How to scale your business without giving away equity

Perceived wisdom suggests carving up some of your business is a necessary part of raising growth capital: but there is another way, as Chris Maule explains.

Setting up a business is undeniably challenging, but growing it into a sustainable, profitable mid-sized company is more difficult. Since the financial crisis, funding in particular has provided a significant barrier to small and medium sized business growth. During this period, banks became unwilling to lend to SMEs, which are often deemed to be higher risk.

This can leave business owners in a position where, if you are seeking investment to grow your business, your only option is to give a chunk of equity away to a venture capital house – something you are likely to be highly reluctant to do.

And so should you be. Unless your business is loss making, there is no reason a financier should demand a stake in your business, with the exception of a strategic investor, who you see value in past their investment dollars.

Our most recent issue provided CommuniGator Ltd, a leading provider of B2B Marketing software and services, with £500,000 of debt finance to fund its next stage of business growth. For CommuniGator, flexibility around security was critical.

No personal guarantees

The business owners specified that they didn’t want to offer personal guarantees, a condition we were able to meet as the Group has sufficient assets to act as security for the funds raised. Kevin Byrne, Executive Director of Communigator describes the process:

>See also: Venture capital – Evaluating the risk profile of investments

“The bond auction process is much like a larger customer event: you send out invites, do all the planning, fear that nobody will come, and then get overwhelmed with the attendee response.

“I worried that nobody would bid in the auction and, in spite of the fact that the bond was underwritten, that would have been a huge disappointment. As it happened, we were well overbid – we were delighted to see that our story and plans clearly resonated with the investor audience.”

In one of our earlier bond issues in the year, we worked with CIP Recruitment to deliver over £1m of debt finance for the company. Despite posting an EBITDA of almost £2m in 2014, CIP’s bank was still unwilling to provide the business with a loan in excess of £1m.

Gary Pinchen, the company’s CEO said: “We sought alternative finance at a time when we needed support, not because of hardship, but because we were ready to grow. We’ve been able to create more jobs, will create more in future, and due to the nature of our work as a recruitment company, will facilitate thousands more jobs outside of our organisation.”

More than simply delivering a given amount of finance, our flexible approach enabled us to structure the bond to provide additional benefits for businesses. Indeed this belief has proved well-founded, as Gary explains: “The investments in our infrastructure we’ve been able to make have made a huge difference to us.

“We wouldn’t be anywhere near as far forward as we are now without the finance we received; it’s moved us forward 3 or 4 stages in our growth plan. The flexibility of the finance doesn’t tie us in – we can repay without penalty after just one year. It’s been the perfect solution for us.”

Natural distrust of banking

There are a number of factors making alternative finance providers such as ourselves an attractive option for businesses. Many business owners who founded their companies just before or during the recession have a natural distrust for larger banking organisations, which are widely regarded as responsible for the economic disruption.

>Related: Is the Northern Powerhouse really fuelling business growth?

Many who have been trading for longer have experienced bank support evaporating in times of economic stress – even if their business is trading well.

Another incredibly important factor for SMEs however, evidenced by our own experience, is the flexibility afforded by alterative finance. Looking at these bond issues, two things become apparent; the wide range of businesses able to benefit from alternative finance, and the numerous flexible aspects that make it such an attractive option.

These include the amount raised and the interest re-paid, but also how security is taken and any additional upside the business wishes to offer in exchange for a lower interest rate.

In summary, the message is this: if you are looking to expand, there are other options aside from venture capital money.

Even as a young industry, funds raised from alternative finance have had a quantifiable positive impact on job creation and business growth across the UK and into Europe, and we look forward to working with many small and medium size businesses make ever-greater contributions to nation’s growth in the years to come.

Further reading: SMEs considering altfi to raise capital

Praseeda Nair

Kellen Rempel

Praseeda was Editor for from 2016 to 2018.