A guide to funding the later stages of the business life cycle

• Businesses transitioning to the next stage of their company’s journey often turn to external funding to boost cashflow and assist with the change.
• Funding options include leveraged finance, asset based lending facilities,  refinancing existing debt and securing Private Equity or Venture Capital backing.
• Whatever option is chosen, businesses should consider their long-term objectives and the benefits of working with a specialist lender.  

If there’s one principle that most businesses apply, it has to be that ‘cash is king’, with external funding used primarily to support liquidity at main crosspoints in the company’s journey. From scale-up, through to diversification and growth, and finally to an exit or buy-out, all these lifecycle stages are vital in establishing a legacy that an owner can then leave behind. And access to flexible funding to deliver on this legacy is a key piece of the puzzle for businesses.

Funding options for different business life cycle stages

Scale-up stage

The scale-up phase comes into play when the business is confident in its foundations and market proposition, and money is needed to invest in expansion and upscaling. At this crosspoint, customers have a range of funding options to support costs such as upgrading equipment and machinery for production efficiencies, opening additional sites, resourcing to expand their teams, investing in new technology and securing acquisitions finance to fast-track growth. 

Bank loans may be an option as are leveraged finance, refinancing existing debt agreements or leveraging one’s capital and paper assets to secure an asset based lending facility. Venture Capital Trusts or Regional Growth Funds are also viable options for equity investment which will dilute owners’ shareholdings but not place added financial obligations on the business. A combination of debt and equity is often a preferred choice during the scale-up stage.

Exit stage 

As a business reaches maturity, owners look towards success planning and will often consider an exit, either in full or in part. In our experience, particularly for small to medium businesses, this will entail a sale or management buyout, a merger or an acquisition.

Another consideration is the option to exit through a sale of the company’s shares. Two popular choices are selling shares to a private equity investor who has the expertise and capital to progress the business to the next level or selling shares into an Employee Ownership Trust (EOT) for the benefit of the staff. In both scenarios, the business is typically able to borrow a material percentage of purchase price, reducing the amount of equity required.

High growth companies may also opt to go public, particularly on the alternative investment market (AIM market) as it caters to smaller businesses and delivers greater access to capital from the public market.

High street banks vs specialist lenders

In reviewing the various types of finance available, it is crucial for businesses to factor in the main objective or purpose of the funding, and whether flexibility or cost are most important.

High street banks will generally provide a variety of products and services including variable or fixed rate loans as well as business accounts and even offer additional benefits such as access to business advice or support with international expansion. These banks also tend to have strict criteria, making access to finance quite difficult for smaller businesses that have a more bespoke requirement and an interesting business story but sit outside the standard risk model.  

This is where a specialist lender can add value – generally taking a more individual approach to enquiries, structuring bespoke solutions and applying product flexibility to the mix. Specialist lenders tend to work closely with each business to really understand its objectives and needs so as to then craft a solution that is right for the client. Their relationship managers will typically have fewer customers than a high street bank counterpart, allowing them to spend more time understanding the ins and outs of a specific business. This means complex cases can benefit from the increased attention, making it much easier to secure the right type of finance and importantly ensure support continues through the life of the loan.

The way forward for funding business growth

No matter which type of funding provider one chooses, evaluating the financial options can help optimise cashflow management and ensure the business continues to grow. In some cases, the business owner may be a specialist in a specific sector and less conversant in finance. For these companies, two factors can help – a solid management team with an experienced CFO who understands the benefit of flexible finance and working with an advisor to introduce a suitable lender and bridge the divide between requirement and deliverable.