What types of investments are available?
Understanding the nuances of investment options is crucial for entrepreneurs and business owners. Investment, the fuel for business growth, can manifest in various forms, with debt and equity being the primary categories.
- Debt investment: Debt investment is a financial loan where a lender, such as a bank or an individual, provides capital to a business. This loan is typically secured against the company’s assets through legal instruments like charges or debentures. For fledgling businesses, lenders may require personal guarantees from directors, reflecting the heightened risk of early-stage ventures.
- Equity investment: On the other side of the spectrum is equity investment, where investors—be it individuals or groups—infuse funds into a business in exchange for ownership shares. Equity is versatile, encompassing various share types and mechanisms to address future contingencies like exits or sales.
How can I choose if debt or equity financing is right for me?
The decision between debt and equity financing is not one to be taken lightly. It hinges on multiple factors, including the company’s life stage, financial health, growth aspirations, and the founders’ willingness to share control. Debt might be the go-to for those seeking a clear repayment plan without diluting ownership, while equity could be the cornerstone for start ups poised for rapid expansion and in need of guidance.
What is the difference between debt and equity financing?
- Ownership: Debt financing does not affect the ownership structure of a business, allowing owners to retain full control. In contrast, equity financing requires owners to exchange a portion of their ownership for capital, often leading to new shareholders who have a say in business decisions and the related profits.
- Revenue: With debt financing, businesses are obligated to allocate a portion of their revenue to service the debt. Equity financing, however, allows businesses to use profits to further grow the company without the immediate pressure of repayments.
- Application process: Obtaining debt financing is typically a straightforward process, albeit time-consuming, involving credit checks and financial assessments. Equity financing, on the other hand, requires a more complex process that includes pitching to potential investors and navigating legal complexities.
- Availability: Start-ups and businesses with poor credit may find it challenging to secure debt financing, as lenders prioritise assurance of repayment. Equity financing is more accessible as it does not rely on traditional lending criteria and is available to companies regardless of their credit history, and hence less risk averse.
- Repayments: Debt financing necessitates regular repayments, which can be fixed or variable. Equity financing does not require regular repayments; instead, investors may expect dividends in the future when the company becomes profitable.
- Interest rates: Interest rates on debt can vary and are influenced by the perceived risk of the business. They can be fixed or variable. Equity financing involves no interest rates, as investors are rewarded through dividends and appreciation of their shares.
- Security: Debt financing often requires collateral and can lead to personal liability if the business fails to repay the loan. Equity financing generally does not involve personal liability, as investors assume part of the business risk.
- Failure: In the event of failure, debt holders require assurance of repayment, which can lead to liquidation of assets to satisfy debts. Equity investors, however, share in the business risk and lose their investment without further liability on the part of the owners.
- Reporting: Debt financing typically involves limited financial reporting obligations to lenders. Equity financing requires regular, detailed reporting to shareholders, who have a vested interest in the company’s performance.
- Exit strategy: There is no further obligation owed to the lender under debt financing once the initial debt has been repaid. Under equity financing, the shareholder is not the only person with a stake in the business and therefore exiting the business can be more difficult.
- Extras: Debt financing often allows access to other banking and credit services, including insurance. Equity financing means access to investor knowledge and established networks.
How can I get Investment ready?
If you’re considering or actively seeking external investment, performing a health check on the business is strongly advised, as investors will perform detailed enquiries as part of the investment process. This includes the following:
- Records management: Ensure that all financial records, health and safety logs, compliance documents, and other business records are accurate, up-to-date, and easily retrievable.
- Employment documentation: Verify that all human resources records are complete, including contracts of employment and current terms for all employees.
- Contracts with third parties: Maintain written agreements with all third parties and ensure they are renewed correctly at the end of each term.
- Statutory books and shareholder register: Keep statutory books and the register of members current, reflecting any changes in shareholding accurately and promptly.
- Intellectual property protection: Review the protection status of all intellectual property (IP) assets, ensuring that registrations are made in the company’s name.
- Licences and consents: Confirm that all necessary licenses and consents are held by the correct legal entity and are up to date.
How can Armstrong Watson support my investment journey?
Armstrong Watson is committed to supporting your business through every step of the investment preparation process. With our expertise in both acquisition and organic growth strategies, we are well-equipped to guide you towards achieving your business objectives and securing the investment you need for success.
For more detailed information or to discuss your specific needs, please contact Armstrong Watson’s Corporate Finance team. We can assist with identifying acquisition targets, negotiating terms, sourcing funding, conducting financial due diligence, and managing investor requirements. We also offer comprehensive support for businesses looking to grow organically, including identifying funding requirements, approaching funders/investors, preparing a business plan with detailed financial projections, negotiating terms, managing funder/investor requirements, and project managing.
