Funding your Business October 2014

1. Steve Plaskitt Corporate Finance Partner 07881 511 853 steve.plaskitt@taitwalker.co.uk • Funding your Business • October 2014

2. Contents • Overview • Finding the right structure • Sourcing the right funding • Internal resources • Grants • Asset finance • Banking • JEREMIE funds • Private Investors • Private Equity • Your Corporate Finance Adviser • Ten top tips

3. Some lending statistics Source: National Audit Office

4. Principal Sources of external finance SMEs are most likely to turn to their bank when seeking finance Source: BDRC Continental, SME Finance Monitor, Quarter 2 2013, August 2013

5. Some BIS-led “Access to Finance” schemes Source: National Audit Office analysis of departmental data

6. Funding your business “If we wait for the moment when everything, absolutely everything is ready, we shall never begin.” Anon

7. High Anticipated Investor Return Low Low High Financial/Operational control Sources of funding Private Equity Private Investors JEREMIE funds Asset finance Bank Financing Internal resources Grantsupport

8. Finding the right structure “When I was young I thought that money was the most important thing in life; now that I am old I know that it is.” Oscar Wilde

9. Finding the right structure What blend of finance works best? • Look at your business first • What do I need funding for? • How much do I think I need? • How much do I really need? • What can I do differently to reduce funding • Will you create jobs and would grants make a difference to whether you go ahead? • What would my banker think? • What is the gap… gap is funded by equity Let’s look at a real example…..

10. Danish customers • Customers required Performance bond • 20% retentions given • Average contract £300k (£60k retention) • Cash flow and working capital issues A client Cash increase >£400,000 • Performance Bond Facility • Working capital issues • Suggested UKTI to get involved Performance bond facility Guaranteed 50% of the bond facility • Guarantee under the Bond support scheme • Working capital issues • Guarantee depending on extra WC being provided • Application made for mezzanine finance • Dependant on Performance bond facility and UKEF guarantee £300,000 investment

11. Preparing for funding Why do you need the money – select an appropriate funder What will the money help you achieve How much will you need How soon can the funder exit and take their return What level of profitability can a business maintain into the future What is the headroom (i.e. how far can things slip) What is the “Plan B” if things don’t work out Regardless of the funder the questions will be the same If you have good answers to these questions your application is much more likely to succeed. We improve the odds from 3% to 75%.

12. Internal Business Resources “A penny saved is worth two pennies earned after taxes” Randy Thurman

13. Internal Resources: • Tax planning (R&D Tax planning) • Performance Bonds (Tees Valley Unlimited Catalyst Fund) • Working Capital Management • Stock management • Debtor collection • Creditor payments • VAT cycle

14. The importance of R&D tax reliefs • Why are they a key source of funding • Four different mechanisms • Worth £18m a year to the North East economy • Can provide up to 54% total relief for costs of R&D for profitable companies • Can provide up to 32.6% rebate on costs of R&D for loss making companies • “Large” companies can now get cash back on R&D projects • Grant funded companies can now get cash back on grant funded R&D projects • The annual value of R&D tax reliefs mechanisms exceeds the value of all RGF grants

15. The importance of R&D tax reliefs

16. Sources of Grants “Free money, free money free money” Patti Smith

17. Sources of Grants (1 of 4) • Technology Strategy Board (visit www.innovateuk.org) • Regional Growth Fund • Other RGF Programmes • Other Grants

18. Let’s Grow versus RGF (2 of 4) Both available for SMEs and large private companies in the North East

19. State Aid Rules (3 of 4)

20. Typical eligible costs (4 of 4) • Safeguarded jobs

21. Asset finance “Intellectual property has the shelf life of a banana” Bill Gates

22. Asset Finance • Invoice Discounting (including single invoice finance) • Catalyst • Inksmoor • Asset Finance • Stock Finance • Asset Based Lending

23. Bank D ebt “Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement” Dan Quayle Bank image slide

24. Bank debt Banks will and should only lend to the right proposition… • “Back to basics banking” – focus on meeting Bank Covenants • Full security • Ability to serve the debt • Strong management with a robust plan • Not too geared in case interest rates increase • Plan B is available too • Some sectors are favoured more • EFG is still available but business owners must demonstrate that they have exhausted all personal security first • “Cash flow lending” may be available in some cases but only to larger businesses.

25. Private Investors/ Private Equity “An investment in knowledge pays the best interest” Benjamin Franklin

26. Private Equity • Crowd sourcing: for up to £50,000 • Business Angels: typically for £50,000 to £250,000 • JEREMIE funders and UK Steel (£150,000 to £1.25m) • Business Growth Fund: for equity over £2m • Private Equity Funds: for equity over £2m for fast growth and quick exit

27. Private Equity – In the business cycle • Launching a new business • Start up • Funding a step change • Rapid, organic growth or ‘buy and build’ • Effecting a change of management or control • Buy-in / buy-out / public to private (NB not with current JEREMIE funds!) • Funding long term development • Typically high technology

28. JEREMIE funds Managed by Rivers Capital Partners £7.5 fund – all eligible sectors Start-ups and early stage businesses £50K to £150K Managed by Northstar Ventures £15m fund – primarily technology Very early-stage start-ups £50K to £150K Managed by Northstar Ventures £25m fund – all eligible business sectors Early stage business with high growth potential £50K to £750K Managed by IP Group £25m fund Focussed on technology £50K to £1.25m

29. JEREMIE funds Managed by Entrust £5m fund – all eligible business sectors Start ups and established micro and small businesses up to £25K Managed by NEL Fund Managers £23m fund - all eligible business sectors Established businesses requiring development capital - £50K to £750K Managed by FW Capital £17m fund – all eligible business sectors Established businesses requiring development capital £350K to £1.25m

30. The role of Private Equity • Picking winners • Working closely with entrepreneurs • Investing in line with Fund objectives • Taking calculated risks • But only if potential reward merits it! • Aim to get • Double their money • Ten times their money

31. Weighing up Private Equity (4 of 4)

32. Your Corporate Finance Adviser “If you think it’s expensive to hire a professional, try hiring an amateur” Red Adair

33. Your Corporate Finance adviser What is my role? • I identify the funding package required • I find funders • I ensure the business model / forecast works • I translate (both to and for the funders) • I present in a way the bank understands • I find the best course of action with existing shareholders • I help negotiate • I project manage so the fund raising process is smooth and you can run your business My aim is to maximise shareholder value…

34. Funding your business is more complex than before Specialist funds are available Start early and be prepared Banks do still lend but you need to be better prepared and think of alternatives Approach the right funders, research and check that the funder is right for you Funders invest in management teams Businesses with strong management with quality information are more likely to be successful Have a business plan and forecast that explains your project, the risks and your Plan B Be prepared to back your business Professional advisors are here to help