smallbusiness.co.uk: Helping your business think big

If the credit freeze is leaving your business out in the cold, other funding in the form of government-backed equity investment schemes could provide you with some welcome capital.

Chris Simpson, Business Link adviser, says that given the reluctance of banks to finance start-ups, ‘there is a definite feel that businesses are trying to attract different types of finance at the moment’.

Giving up a portion of equity in your business for an injection of capital from an investor or group of investors may be the answer, although it’s not a decision to be taken lightly.

Firstly, you have to accept that you won’t be in full control of your business. That can be a benefit, in terms of individuals sharing their experience and contacts, but if you’re not the sort who likes to be held accountable, bringing investors on board could very easily end in tears.

Secondly, finding investors is no easy task for a start-up, no matter how ambitious. Be sure you have a proper business plan that involves a clearly defined exit for potential investors.

If you think that equity finance is the way forward, here are some of the more popular schemes out there:

Enterprise Capital Funds

Launched two years ago, there are eight Enterprise Capital Funds (ECF) across the UK. They were established to provide equity finance to SMEs. Each uses government money, alongside private sector funds, for investments up to £2 million.

IT company Ibexis secured over £100,000 in funding with ECF money last month through venture capital firm Oxford Technology Management. Director at Ibexis, Darren Rickless says: ‘For us, it wasn’t just about the money but having a good venture capital brand that could give us some guidance.

‘We didn’t approach the bank. I’m not sure there are many bank loans for businesses at the moment, I have friends who are going down that route and it is very difficult for them.’

Oxford Technology Managment's MD Lucius Cary says: ‘This is certainly a useful alternative [to bank funding], as it is one of the only ways small businesses can seek small amounts of equity funding.’

Capital for Enterprise Funds (2009 initiative)

Launched in January as part of the government’s rescue package for small businesses, the funds are intended for companies that have reached the extent of their ability to borrow from the bank due to the credit freeze. These funds comprise a total £75 million.

These funds are aimed at robust businesses which have historically funded their growth through bank lending, but if they don’t get more funding their ability to grow and create jobs will be stifled.

A typical fund will invest through fund managers (usually two) who will operate where growing businesses have traditionally struggled to gain funding of between £250,000 and £2 million (known as the equity gap).

Investment will be aimed at fundamentally sound businesses with existing cash flows and genuine growth potential but that are currently constrained through being over geared.

Aspire Fund

Launched last year, the Aspire Fund is intended to encourage female entrepreneurship.

While not exclusively for females, it leans towards companies with 30 per cent or greater women on the board or a senior executive team with 30 per cent or more female representation.

The Aspire Fund operates with private sector backers on a co-investment basis, providing between £200,000 and £2 million. If your business is currently looking for a lead investor, it also provides an investment readiness programme, whereby introductions are made with possible private backers.

For more information visit the Capital for Enterprise website.

There are currently no comments on this article