1. Equity financing
Equity financing is when a business raises capital by selling parts of it, known as its shares. The people that buy these and help raise the cash needed are known as the business’ shareholders and they will have a stake in the business. Depending on how many shares they own, they could be minority or majority shareholders, which means they’ll have different levels of involvement in the running of the business, choosing the board of directors and the overall growth direction and strategy.
Businesses can find shareholders in a few different ways depending on what they need the investment for and what stage they’re in. Start-ups and scale-ups may look for angel investors or venture capitalists that want skin in the game early on in a business’ life cycle – often this investment is higher risk and therefore can be a higher reward for an investor if the company succeeds.
Private equity
Bigger, more established businesses, may look to raise cash via private equity firms (PE). Private equity firms raise capital on behalf of businesses from institutional investors such as pension funds. They often subsidise this capital with their own, or leverage the funds with debt finance, and create specialist private equity funds which they use to invest in different businesses.
It’s important to note that private equity firms have a very specific aim when they invest in a business, as they’re looking to bring in returns for their shareholders, typically by growing the business up, maximising its value, and then exiting it at an increased value. Typically this level of financing is only available for already successful and profitable businesses, as opposed to startups or early-stage scale-ups.
Initial public offerings (IPOs)
Another form of equity financing is an initial public offering (IPO). An IPO is when a private business lists on a public stock market for the first time, allowing members of the public to purchase shares in the business. The stock price floated on a public market will be determined by a private valuation as part of the due diligence process. Recent successful IPOs on the London Stock Exchange include the Danish consumer feedback business TrustPilot which was listed in 2021 raising £473 million and increasing stock value by 16%.
IPOs can be an effective way to raise a lot of capital very quickly, but they don’t come without their risks. Once a company goes public it risks losing control of its decision-making and will have to act in the interest of wider shareholders when it comes to electing board members and management teams.
Overall, raising equity is a very effective way of accessing business finance, but the below factors will impact the types of investors you should target and the type of investment you can get:
- Company size
- Company sector
- Company management teams
- Years operating
- Company growth
- Revenue and profitability
- EBITDA
2. Debt financing
Business finance is often split into two camps – equity finance and debt finance. As mentioned, equity financing is where a business sells portions known as shares in return for capital. Debt financing on the other hand is a type of business loan where a business buys money from a lender, and then pays it back with added interest. Lenders offering debt finance often include large high street banks as well as newer challengers or neobanks. In fact, according to the British Business Bank, in 2020 it was these new specialist lenders which provided over half of the overall debt provided to UK businesses.
When it comes to debt finance, also known in the industry as debt facilities, there are a few different types of products that fall into the category. The most common are secured business loans, unsecured business loans, revolving credit facilities, term debt, and business overdrafts.
At OakNorth we offer unsecured and secured business loans, and we can offer them over an agreed term, or as a revolving line of credit. All of our loans are bespoke and tailor-made to help a business meet its growth objectives.
Who is debt finance for?
Depending on the size of your business, how long you’ve been operating and how profitable you are there will be different types of debt your business can look at. If you’re a smaller business looking to improve your short-term cash flow to pay suppliers and staff and keep day-to-day operations running smoothly, you might consider some of the below types of debt.
Short-term debt finance options
Invoice financing
If you’ve got outstanding invoices waiting to be paid but you need liquidity, you can get an advance on your owed invoice amounts from a lender. They’ll loan you the money you’re waiting for, and they’ll typically then collect the invoice payment directly from your suppliers or customers and deduct the interest and any other fees owed.
Asset financing
A business can use its current balance sheets – including its accounts receivable, inventory, machinery or vehicles as security to borrow money to help them cover short-term working capital.
A business overdraft
A business overdraft is similar to a personal overdraft. It’s an agreed line of credit that a business can use to cover peaks and troughs that come with seasonal trading. Business overdrafts are repaid with interest charged on the amount of funds you used within your overdraft limit.
Longer-term debt financing options
Medium or larger businesses may want to take out debt for long-term growth opportunities such as mergers and acquisitions, management buyouts, or expansion into new products or markets. Businesses using leverage for expansion and long-term growth are typically in a stronger financial position, are well-established within their market and industry and have been turning a profit for a while.
All of these factors allow expert businesses access to a larger amount of debt so they can continue to grow at a faster pace. Depending on the sector or growth goals, businesses will look for more specialist financing such as:
Property finance
Property finance is a type of specialist debt finance that helps the real estate sector with new development or property investment growth. Developers often take out debt to build new carbon-zero homes, refurbish old run-down buildings turning them into new offices, retail spaces, hotels, restaurants and more. At OakNorth, we support experienced property developers ready to take on exciting new opportunities and property investors looking to expand their residential or commercial portfolio.
Revolving credit facilities
A revolving credit facility, also known as a revolving credit line or revolving finance is an agreed line of capital given to a business by a lender. They’re similar to a business overdraft in that businesses and lenders will agree on an upper funding limit which is the most money a business can draw down during the course of the agreed term. However, they’re different to a business overdraft in that they’re not tied to a business current account and the borrower draws down, repays and then can draw down again, hence the name revolving. Find out more about OakNorth’s revolving credit facilities.
Acquisition finance
Acquisition finance, also known as merger and acquisition financing (M&A financing) is specialist corporate financing structured for businesses looking to buy other businesses, either in full or partially. Acquisition financing can come from either debt or equity and is often a mix of both. Find out more about acquisition financing and how OakNorth can support your M&A projects.
3. Government grants
Business grants are typically one-off payments given by the government to businesses to help their growth and development or to help them achieve specific goals – for example, reduce their carbon emissions, or develop new technologies or medical breakthroughs. Grants are different to equity and debt in that they don’t require you to give up any of your business and the capital is not repaid. Business grants are tailored for specific sectors, business sizes and regions and the eligibility criteria for each grant will vary, depending on what the grant is given for. You can find more information about government grants on the official government website.
4. Research and development finance
If your business is pioneering new technologies and research or innovating and automating processes to increase efficiencies and improve productivity then you may be eligible for R&D investment. Innovate UK supports business-led innovation across a range of different sectors and disciplines. They have a range of financial support, from grants to loans and fellowships.
5. Crowdfunding
Crowdfunding is where a number of individuals invest, lend or contribute money to a business or business idea to help it succeed. Crowdfunding is often used by startup businesses, or early-stage SMEs, to help them with initial launch and scaling costs. The shoe company, Allbirds, now one of the fastest growing shoe companies in the world (surpassing Nike), crowdfunded for rewards in 2014 on Kickstarter reaching their target goals in just five days. There are a few different types of crowdfunding suited to different entrepreneurs:
Reward crowdfunding: This is when investors provide capital in return for non-financial benefits such as exclusive access to the product/s pre-launch.
Equity crowdfunding: This is when investors provide capital in return for shares in your business.
Debt crowdfunding: This is when investors provide capital in return for their money back plus interest.
