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There are several sources of financing available to companies, depending on the sector they are in, and the stage of development. The below discusses a few options:
Startups And Early Stage Companies
Startups and early stage companies tend to have unproven track records from a bank funding point of view and cannot offer asset backed security, so often need to rely on State grants, such as from LEO for third party funding. Typically, they will also be funded by the promoter themselves, or family members. This can take the form of equity (ie share ownership) or loans. In some cases, the loans can convert to equity depending on agreed criteria.
Investment By Way Of Shares
If the investment is by way of shares, then these can be ordinary shares, which are typically voting/ control shares, or preference shares. The preference shares will usually not entitle the holder to voting rights but will carry an agreed coupon (ie interest rate) for the period they are held. In most cases the preference shares can be converted to ordinary shares, or redeemed, depending on the terms agreed.
Funding From Financial Institutions
As a company develops and perhaps has a trading history and more assets for security, it then has options to get funding from financial institutions, or from private investors. Many businesses are looking for alternative sources of funding, and a market has developed where private individuals with cash on hand lend the money to businesses at an agreed rate, over an agreed term.
Term Loan Facilities
Companies with strong asset positions can typically use these assets as security to get term loan facilities from their banks, who then take a charge or mortgage over the assets of the company. Term loans can vary in length from 3 years to 10 years, and the term will typically be dictated by what the loan proceeds will be used for. They are routinely used, for example where a business might acquire another business, and will generate a return from that investment over several years. Instead of repaying the loan over a short term, which could put it under cash flow pressure and stifle growth, these are typically put over a 5–7-year term, to better reflect the return-on-investment timeline.
Venture Capital Funding
Finally, there is an option, which typically technology or pharma companies consider, which is venture capital funding. This is where third party professional investors pool their monies and the venture capitalist will have specific investment criteria and rate of returns they are trying to achieve. This usually also involves a specific timeframe, as each fund has an agreed finite life, after which the investors get their returns if any.
There are several options out there, depending on the stage the business is at, and how many rounds of funding are required. There may be options to get funding from Enterprise Ireland or similar institutions for these companies. In most cases, there may be a few rounds of venture capital funding, as equity investment is the most expensive form of funding (it is also the riskiest as the investors rank the same as the business founder if things don’t work out, i.e. last), and is unsecured. The reason there are a few rounds is so that the business can build up enough value from the previous round to ensure that the business founders don’t end up selling their shares in the company too early to later see others make a windfall gain.
The appropriate type of funding can also depend on what it will be used for, and what the associated loan security might be. If purchasing say a freehold property, then this will usually be by way of medium to long term bank loans, and the bank secure their loans over the property. However, they will not finance all of the cost of the property; typically around 70%, so the remaining balance will need to come from the company or the shareholders themselves.
If looking to fund working capital on the other hand, that could be by way of unsecured bank overdraft (which is usually more expensive than a term loan, because the bank doesn’t take any security for this), or some form of factoring, letters of credit or invoice discounting. These options require the company to offer the debtor book or stock as security over these loans. The loans are short term in nature, and typically become a rolling credit facility for working capital needs.
If looking to purchase other fixed assets such as vehicles or IT equipment, then leasing or hire purchase may be appropriate. These finance options will typically run for 3-5 years, depending on the useful life of the asset being purchased.
The above is a summary of some of the finance options that are available. Each case is different though, so seek advice before starting your journey. The information the lender or investor will request will vary for each case, so it’s important to know what will be required and to have it ready before you begin. If you need advice on funding options, please contact us here in Connors & Co.