- Venture capital
- Equity investment
- Debt funding
- Mezzanine funding
Venture Capital (VC) investors typically operate at the riskier end of the market – often investing smaller amounts in start-ups and early-stage businesses which are developing new products and technologies, or firms which have yet to generate revenues or profits. VC funds tend to have a longer life span than private equity (PE) investments. The companies they suit are often run by management teams with limited experience and there are few assets available to secure bank debt. Most VC firms therefore commit a substantial proportion of their investment in the form of equity.
Typically VC deals will be smaller than PE transactions (although there have been exceptions – notably with some of the well-known tech successes on the west coast of the US) – and can range from seed funding in the tens or hundreds of thousands of pounds to much larger amounts of development finance (often known as Series A, B & C rounds) to take the business to the next stage.
Equity investment can come from friends and family, business angels or VC / PE firms. Equity capital is an investment made in the business in return for a shareholding in the Company – usually based on an agreed valuation. Unlike a debt provider, an equity investor will usually only be re-paid if there is a sale of the business or in a situation where s/he is bought out by someone else so there is a risk of loss if the company runs into trouble.
Where a debt provider can expect to receive regular interest payments on their loan or overdraft, an equity investor only receives an on-going return or dividends if the business is making sufficient profit over and above its working capital and re-investment needs.
If the business achieves a successful exit, equity investors can enjoy a significant return on their original investment, which is why they frequently look for a minority ownership position in return for their money.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the rights to convert to an ownership or equity interest in the company in case of default, or sometimes through an equity ‘kicker’ (the right to a small equity stake) when the debt element is repaid or on exit, once other lenders are repaid.
Unlike other debt funding, mezzanine financing is typically unsecured, but carries a higher interest rate than normal secured lending and is generally treated like equity on a company’s balance sheet.
Where a business needs finance for expansion and is reasonably confident in terms of future profits and cash flows, mezzanine funding can offer greater stability and less risk than conventional debt, without sacrificing too much of the upside.
Debt funding is the most common source of funding for businesses across the UK. The major providers of debt finance are high street banks, although PE firms (and occasionally VC investors) will often include some debt funding as part of their overall investment package.
Providers of debt finance do not expect a share in the upside or look for a board position or a role in the management of the business, however they do expect to be paid back – both the interest on the debt and the capital repayment when the time comes.
If the business finds itself in difficulties, the lender usually has the right to call in the receivers or to force a sale of the business or its assets. In these circumstances, a ‘fire sale’ will often lead to losses for trade creditors and shareholders alike.
Where a business owner has the assets to secure a loan (or is willing to provide a personal guarantee), a strong (and predictable) cash flow and a good credit rating, then debt finance is a promising option.
To secure finance, every entrepreneur needs a business plan. Government advice about why these are needed and how to write one can be accessed here.
Business outside of the North East LEP area, which covers Northumberland, Durham and Tyne and Wear, are not eligible for investment from the North East Fund, but we are happy to refer you to another funding source in your area.
Each fund manager can offer investment on different terms, and if your business is suitable for investment they will discuss the best way to tailor an appropriate repayment structure.