How to raise capital.

A practical guide for UK founders

By Kevin Kearney, Co-Founder, Pivotal Finance

If you are running a growing business in the UK and thinking about raising capital, it’s important to understand which type of funding is right for your business.

This blog covers the main options available to UK businesses, what investors and lenders look for, and how to make sure your finances are in the right shape before you start.

Understanding the funding landscape

At the broadest level, funding falls into two categories: equity and debt. Within each, there are several routes to consider.

Equity funding

Equity means selling a stake in your business in exchange for investment. The investor takes a share of future value in return for the capital they put in today.

Appeal: you receive funding without taking on repayment obligations.

Trade-off: you own less of your business after the raise.

For early-stage UK businesses, there are two government-backed schemes to be aware of and offer increasing access to early stage funding:

1. Seed Enterprise Investment Scheme (SEIS)

●      Designed for very early-stage businesses

●      Offers investors 50% income tax relief on investments of up to £200,000 per year

●      Specifically structured to reduce the risk of investing in young companies

2. Enterprise Investment Scheme (EIS)

●      Designed for businesses that have outgrown SEIS eligibility

●      Offers investors 30% income tax relief, with larger investment limits and the ability to defer capital gains

●      Once a company issues EIS shares, it cannot go back and use SEIS.

Beyond these schemes, angel investors, venture capital funds and private equity all play a role depending on the stage and scale of the raise.

“Equity means selling a stake in your business in exchange for investment.”

Debt financing

Debt does not require giving up equity, but it does require repayment. For the right business at the right stage, it can be a highly efficient way to fund growth. Options range from traditional bank lending to government-backed schemes.

●      The British Business Bank – provides financing to smaller businesses that may not qualify for mainstream commercial lending.

●      The Start Up Loans programme - offers fixed-rate loans with free mentoring; a practical option for businesses at the very earliest stage.

●      Venture debt – is an option for businesses that have already raised equity, allowing companies to access additional capital without significant further dilution.

In most debt finance cases, you will be required to demonstrate affordability and be asked to offer forms of security over your assets or provide personal guarantees. This should not be taken lightly and advice should be sought before entering into any agreement where you could become personally liable if things go wrong.

Grant funding

Grants are non-dilutive and non-repayable, which makes them attractive, but they are also highly competitive and often come with conditions attached around how funds are spent.

Innovate UK is the primary source of innovation grant funding in the UK but there are European grants also available.

●      Offering awards ranging from tens of thousands to several million pounds for qualifying research and development projects

●      Success rates are low and the application process is time-consuming, but for businesses operating in innovative sectors the effort can be well worth it.

R&D tax credits are also worth understanding as a source of non-dilutive funding, particularly if your business is investing in qualifying research and development.

What investors and lenders are looking for

The key question from all lenders is: Can this business make productive use of this capital and provide a return?

Equity investors will likely want to know:

●      What growth goals will the capital drive?

●      What returns are projected over what period?

●      Can the business substantiate this with a track record that demonstrates strong execution?

Debt lenders will ask:

●      Can the business comfortably afford the repayments?

●      What happens to that picture under a range of scenarios?

In both cases, the quality of your financial information matters enormously. Investors and lenders are experienced at identifying businesses where the numbers do not stack up. Getting this right before you enter a process is essential.

“Investors and lenders are experienced at identifying businesses where the numbers do not stack up.”

Getting your finances ready

The most common mistake businesses make when approaching a raise is starting the financial preparation too late.

Practically, being raise-ready means having:

●      Clean, accurate financial records

●      A financial model that clearly demonstrates your assumptions and sensitivities

●      A coherent narrative around how the capital will be used and what it will deliver

●      A solid understanding of your key metrics and how they benchmark against comparable businesses.

●      Being clear and honest about the risks.

A final thought

Raising capital is one of the more demanding things a business leader has to navigate. The businesses that tend to do it well have done the preparation properly, understand what they are looking for and why, and have experienced people around them to challenge their thinking and keep the process on track.

If you are approaching a raise and want to talk through your options, book a free discovery call with the Pivotal Finance team today.