Later stage funding solutions for established SMEs

Amy Beasley, director at Shawbrook, discusses the lifecycle stages of a business and the funding options available to SMEs.

Whatever the sector and the long-term objective, the one common concept for most businesses is that ‘cash is king’ and owners only look to external funding to support liquidity at key stages of the company’s journey. 

For every business, the journey and the crossroads will be different. Whether at scale-up, a growth and diversification point or an exit or MBO, planning your financials will be fundamental and the outcome of these lifecycle stages will be instrumental in the development and history of the business.

The scale-up stage

The scale-up phase comes into play when the business has established its foundations and market proposition, and money is needed to upscale and expand. At this crossroad, businesses can consider a range of funding options to assist with costs including investing in new technology, upgrading equipment and machinery for production efficiencies, opening additional sites, resourcing to expand their team and completing acquisitions to fast-track growth. 

Bank loans could be an option as are commercial loans, refinancing existing debt agreements or leveraging one’s capital and paper assets to secure an asset based lending facility. Venture Capital Trusts or Regional Growth Funds are also viable options for equity investment which will dilute owners’ shareholdings but not place added financial obligations on the business. A combination of debt and equity is often a preferred choice during the scale-up stage.

The exit stage 

Where a business has reached maturity, the owner will often look towards success planning and consider an exit, either in full or in part. For small to medium businesses, this may entail a sale or management buy-out, a merger or an acquisition.

Two favoured choices are selling shares to a private equity investor with the expertise and capital to progress the business to the next level or selling shares into an Employee Ownership Trust for the benefit of the staff. In both scenarios, the business is typically able to borrow a material percentage of purchase price, reducing the amount of equity required.

High growth companies may also opt to go public, particularly on the alternative investment market (AIM market) as it caters to smaller businesses and delivers greater access to capital from the public market.

High street banks vs specialist lenders

When reviewing the various types of finance available, it is crucial for SMEs to consider the key objective or purpose of the funding, and whether flexibility or cost are most important.

High street banks will generally provide a variety of products and services including variable or fixed rate loans as well as business accounts and even offer additional benefits such as access to business advice or support with international expansion. These banks also tend to have strict criteria, making access to finance quite difficult for smaller businesses that have a more bespoke requirement and an interesting business story but sit outside the standard risk model.  

This is where a specialist lender can add value – generally taking a more individual approach to enquiries, structuring bespoke solutions and applying product flexibility to the mix. Specialist lenders tend to work closely with each business to really understand its objectives and needs so as to then craft a solution that is right for the client. Their relationship managers will typically have fewer customers than a high street bank counterpart, allowing them to spend more time understanding the ins and outs of a specific business. This means complex cases can benefit from the increased attention, making it much easier to secure the right type of finance and importantly ensure support continues through the life of the loan.

Looking to the future

Whichever type of funding provider and facility one selects, evaluating the financial options and their flexibility can help optimise cashflow management and ensure the business continues to grow. In some cases, the business owner could be a specialist in the sector and less conversant in finance. For these companies, two factors play an important part – a solid management team with an experienced CFO who understands the benefit of flexible finance and selecting an advisor who knows the company’s ethos and can introduce a suitable lender to bridge the divide between requirement and deliverable.

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