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Sources of finance for the Owner Managed Business

6th December 2017

Owner Managed Businesses (OMBs) need funding and investment to help growth as any other business does. However, seeking outside funding without losing sight of the family ethos and values can be a difficult area.

Traditionally many OMBs are funded by family members who are either directly or indirectly involved in the business. On top of this there is likely to be some conventional bank borrowing or a loan. This is not necessarily a drawback, but if further family investment is not available and with traditional avenues of finance becoming harder to come by, it is important to consider and understand all of the funding options, both traditional and alternative, that are available.

The reasons for not pursuing other sources of investment or funding can also be a strong reluctance on behalf of OMB owners to giving up any of the family equity. In addition alternative investment is either overlooked or discounted due to a lack of awareness of what funding is available, how it can be accessed and the terms for gaining any investment.

However, there may be times when additional external funding is crucial to help the business grow or get through a difficult period. To help OMBs consider the options available for external investment. Exeter Partner Jon Westley takes a look at a number of finance routes that are available from traditional bank lending through to crowdfunding and business angels.

What sources of finance should be considered?

High street banks – After family member investment, this is often the OMBs first thought when looking for funding. High street banks pulled back from lending to smaller businesses after the financial crisis, as regulatory changes made offering finance to small and medium sized businesses less economical. This made bank lending to small businesses, including OMBs, much more difficult.

However, the UK government has recently struck a deal with Britain’s biggest high street banks to extend millions of pounds of lending to small businesses as part of broader plans to boost exports and buoy the economy after Brexit.

Despite the above, banks are still adverse to risk and gaining bank funding can still be difficult for small businesses unless there is a robust business justification. The most important thing with any approach to a bank is to gain professional guidance on preparing your business plan before taking things forward. This will greatly improve your chances and give you the best chance of getting it accepted.

The business angel investor – Business angel investors are often retired entrepreneurs or executives, who may be interested in angel investing for reasons that go beyond pure monetary return. These include wanting to keep abreast and involved in a particular business arena, mentoring another generation of business entrepreneurs, and making use of their experience and networks on a less than full-time basis. Typically, this type of investor will give more favourable terms than other lenders, and will be more focussed on aiding the continued success of the business.

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – To make yourself attractive for investment smaller OMBs should also consider investment via EIS or SEIS. The purpose of the EIS is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors in qualifying shares in these companies. Although the tax reliefs are available only to the investors and not the company itself, the intention is that an EIS Company will be attractive to potential investors, thus helping it raise finance.

SEIS offers tax efficient benefits to investors in return for investment in small and early stage start-up businesses.  It is designed for young companies not more than two years old which have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.

Asset backed lenders – An asset based loan is a type of business financing that is secured by company assets. Most asset based loans are structured to work as revolving lines of credit. This structuring allows a company to borrow from assets on an ongoing basis to cover expenses or investments as needed. The assets are usually a combination of physical assets (stock, plant and machinery or equipment) and invoices (debtors).

Grants and tax breaks – Many OMBs and family run businesses are missing out on funds by not realising they are eligible for tax breaks or government grants. The UK government is actively looking to support businesses that are making valuable research and research contributions to the UK economy.

Research and Development (R&D) tax reliefs allow businesses to offset R&D costs by either reducing their corporation tax bill or obtaining cash rebates for a loss-making business. This relief is not just open to ‘white coat’ scientific research, it is open to any company seeking to make an advance in science or technology.

This is a valuable grant and recent improvements to the R&D tax relief system, now make it more accessible and valuable for owners of growing businesses.

Debt factoring and invoice discounting – Factoring involves selling any unpaid invoices to a third party and paying interest and/or a fee on them. The third party will then collect the debt themselves.

Invoice discounting provides a means of borrowing money against any unpaid invoices owed to your company (again, for a fee). As your invoices are paid, the amount you owe the lender decreases.

These forms of finance can often be a good way of releasing cash tied up in unpaid invoices back into your business.

Peer-to-peer lending (P2P) – Peer-to-peer lending platforms match businesses directly with individuals or organisations who are willing to lend money. Investors receive their money back with interest.  One of the most well known in the UK is the Funding Circle. Funding Circle is supported by British Business Bank Investments Ltd, the commercial arm of the British Business Bank, a development bank wholly owned by the UK Government. In 2017, British Business Bank Investments Ltd committed £40 million, in addition to its £40 million commitment in 2014, alongside other investors, to support economic growth by providing more efficient finance to smaller businesses.

Applicants submit their proposal and investors bid via a marketplace to support the businesses that appeal to them. Loans tend to be quick and made up of many small investments, which is why investors find it appealing as they can spread the risk.

Crowdfunding – Crowdfunding has become one of the mainstream routes for accessing alternative funding in recent years. Individuals or organisations can invest in start-ups and growing businesses in return for and equity. Web based crowdfunding platforms like Crowdcube can be used to pitch a business idea to large groups of people, who, if interested and convinced by the proposal, have the option to respond by donating a small portion of the total money the borrower needs to reach the target investment needed.

One of the other advantages of crowdfunding are it can help get your business plenty of exposure and a wealth of useful feedback. This is certainly an option if you are comfortable with putting your business idea out there for all to see.

Pension-led funding – Pension-led funding is an option for anyone with private pension savings. It works best if you have accumulated a decent sized pension pot and this has tended to see it used most often by older small business leaders.

It is a practice whereby business owners can access some or all of their pension funds that they may have accumulated from past or present employment and use this money as a cash injection of funds into the business. Pension funds are either transferred into either a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS). Both are pensions that allow the business owner, not the insurance company, to make decisions as to where the money is going to be invested.

Summary

In summary, all sources of finance for the OMB family business have their place and different types of funding will be more or less appropriate at different times of the business life cycle. You may also have short, medium or long term funding requirements and need to consider if debt or equity financing is right for all family members who are involved.

Deciding the right source of finance is a crucial decision for all types of business and should be taken only after careful considerations of the pros and cons of the various options available and the risks that you and other family business members are prepared to take.

At Thompson Jenner we can draw on over 60 years of experience of dealing with owner managed businesses, advising on different ways to finance. We have strong links with Banks and other lenders and are always happy to discuss your individual business circumstances and assist you with any business planning requirements to support your funding or grant applications.

 

If you would like to find out more or meet to discuss the services which we are able to provide, please contact Jon Westley or one of our specialist Partners on  01392 258553 or 01395 279521 to arrange a free initial meeting.

 

 

 

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