Your business is growing and you have ambitions for the future. Maybe you’re eyeing up a strategic acquisition, or maybe it’s organic growth that’s on the agenda – hiring more staff or entering a new market.
To fulfil your plans, you need investment. So who do you turn to? Is bank debt the best route, or private equity investment? Should you even consider an IPO and raise capital that way?
These are common questions that we’re frequently asked. The fact is, there’s no simple answer. It really does depend on the individual circumstances, footprint and ambitions of your business. It’s also quite possible the answer will be a combination of investment sources, rather than just one. Having said that, some general themes and principles do apply.
Bank debt can be a low-cost option
Firstly, bank debt is cheaper. It will probably come at a fixed rate so that you’ll know exactly what your repayment schedule will be. And if your investment needs are relatively modest, it can often be leveraged against existing assets or cash flow.
It’s generally a simple equation: here’s the money, here’s the repayment agreement and the covenants you need to meet - now it’s over to you.
While many banks are keen to position themselves as lending partners to their business customers and will invest in a certain amount of relationship development and support, it’s more limited than you would see with an equity investor, who generally is more focused on maximising the upside, and has less downside protection. Debt capacity is usually more limited and provides a lower risk funding line without the need to give away equity.
Private equity with plenty to invest
And what of private equity? The profile of PE investment has risen massively over recent years. PE houses have become extremely active, investing in businesses across all sectors and right from the start-up phase. Currently, they have almost unprecedented amounts of capital to invest. This is partly due to the interruptions created by the pandemic, when many deals were put on hold. Now, it’s as active as I’ve ever seen in my career. There’s a wall of capital available and competition is fierce between houses to land the best deals.
A great time to look for PE investment then? Certainly, if your business has a good story to tell, data to back it up, and a clear strategy for the future, then conditions look quite favourable. Don’t forget that PE investment generally works over a 3-5 year cycle – when they’ll be looking to exit and make their return. So it’s also essential to have a really clear roadmap that shows a potential investor how that exit plan could work.
We’re now seeing ESG forming a key part of the investment decision for investors. No longer just a differentiator, a consideration of ESG by investee companies is becoming critical to securing investment. And we’re even starting to see margins on debt lending being linked to achievement of sustainability criteria for larger businesses. All signs suggest ESG is becoming increasingly important.
For more information on the funding and acquisition options that might be right for your business, see our Ready to Grow Again guide.