Accessing equity finance

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Accessing equity finance

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Why should you read this guide?

Most businesses at some point need money to help them grow and develop. There are a number of ways to access this money and one of them is equity finance. Equity can assist your cash flow when compared with debt because it doesn't need to be repaid on a monthly basis. This is especially useful for a new start business or a new product or project launch where sales are initially low.

Background

Equity can take a number of forms, but is essentially a cash investment into a company designed to help that company achieve growth which will result in that company becoming more valuable as a result. In return for the cash injected the funder receives a "share" in the business. The shareholding received by the investor is agreed in advance with the business owner and will depend on a number of factors such as: the amount being invested, the existing trading performance of the business, the strength of the management team, the value of existing or potential contracts, the value of intellectual property held and the amount of time investment required from the funder or their representatives. Probably most important of all is the growth potential of the business.

How to access equity funding

Equity funding can be as simple as your own or a family investment in your company. It can be as complex as a syndicate of international equity investment houses investing in your company. The detail of how you go about raising equity will change accordingly, however many principles are true to every situation.

You will firstly need to demonstrate that the existing business (or new business) is a viable trading entity. This means demonstrating a sound management team exists, profitable trading, protection of intellectual property and most importantly a large market for your product or service.

To show this you will need to develop a robust business plan that demonstrates you have fully analysed both your current and future positions. You will also need to show how the investor will get their money back within the plan.

It is also important that you know what you are looking for and what you are willing to give away before you engage in discussion with potential investors. Remember that despite appearances, this is a two way discussion and you will need to be able to work with your investor over a long period of time. When it comes to price remember to value the skills and contacts being brought by the investor - or is it just money they are offering?

Who provides equity investment?

Funding can come from different types of individuals and organisations. Friends and family are probably the most straightforward people to deal with if you require a small amount of equity. Business Angels are individuals who usually invest alone using their own funds. They often seek investments in industry sectors they have worked in themselves. Angel syndicates are groups of Business Angels who have pooled their resources and invest as a group. These syndicates often employ a "gatekeeper" to review opportunities sent to them. Venture Capitalists (VCs) tend to seek larger investments in bigger businesses. These funds are often financially backed by well known institutions.

It may also be appropriate to look at listing your company on the stock exchange. Private investors will buy shares in your company and these shares can be traded on a daily basis. PLUS and AIM give smaller companies the chance to join the market before becoming fully involved on the main market. Specialist advice is required in this area.

Summary

To access equity investment you must have a strong business plan that shows you have a viable business idea that will make your business grow quickly. You will need to be able to present your plan confidently and show that you have thought how the investor will be repaid. Understand what you are looking for from your investor and make sure that the deal is right before you agree to take their money for a share in your business. As you grow you also have the option to raise funding on one of the London markets - PLUS, AIM or the main market.

Further information

Log on to www.bbaa.org.uk for information on Business Angels and individuals who can help deal with them successfully. Log on to www.bvca.co.uk/ for information on Venture Capital and advisors who can help you access funding. Another worthwhile site for businesses considering equity investment is the Business Link www.businesslink.gov.uk