Andy Gregory of equity investor Business Growth Fund argues that construction SMEs looking for funding to grow should embrace the “new normal” of equity finance.
Access to finance is not a new issue for British business. The decline in traditional bank lending in the wake of the credit crisis has been a hot topic during the past few years, with the construction sector hit particularly hard.
The UK construction industry is worth more than £90bn a year, which is between 7 and 8% of total UK GDP, and illustrates its importance to the overall performance of the UK economy.
BGF (Business Growth Fund) is an independent company with capital of up to £2.5bn, backed by five of the UK’s main banking groups – Barclays, HSBC, Lloyds, RBS, and Standard Chartered. BGF has made a number of investments in growing businesses in the wake of the improving construction market, most recently investing £2.5m in Horbury Group, a Rotherham-based specialist interiors subcontractor. The investment will enable Horbury to tender for larger, and a greater quantity of projects. Horbury also now expects to significantly increase its workforce in the year ahead.
This is exactly where BGF’s growth capital is intended to help – enabling businesses to capitalise on opportunities that they may otherwise be unable to take full advantage of.
With the UK economy now out of recession and businesses exploring options for growth, it is important that entrepreneurs and management teams are aware of the alternatives to bank finance and how to access the funding they need to grow their business.
Generally speaking, there are two options for business finance – debt and equity. UK businesses have historically been over-reliant on bank finance, which led to an exaggerated impact on the ability of firms in the wider economy to secure finance when the banking system encountered difficulty. Post-recession, the old “norm” is dead, and we strongly believe that today businesses must embrace other forms of funding if they are to progress with their growth ambitions. In fact, history already shows that few long-term successful businesses are built on debt alone.
Growth capital investors, like BGF, buy a minority stake in a business at a fair price. They take a calculated risk on its future and gain from shared success with management. It is a vote of confidence in an entrepreneur’s ability to build a stronger, more valuable business.
BGF will make an initial investment of between £2m and £10m, but with £2.5bn of committed capital it has deep pockets and the ability to provide follow-on funding as a company continues to grow. And because we invest from such a strong balance sheet ourselves, BGF is able to take a genuinely long-term view (as much as 10 years).
Typical companies are privately owned, profitable and have a turnover between £5m and £100m, but can come from almost any sector and be located anywhere in the UK.
Many entrepreneurs and management teams are deterred by misconceptions about equity finance, which prevents them from seeking more information about the options and whether it would be the right fit for their business.
Providers of equity finance need to work hard to define what they offer and earn the trust of businesses they seek to support.
I have never met an entrepreneur who willingly wants to give away part of the business they have built. But I have also never met a successful entrepreneur that doesn’t want their business to be more successful. Businesses need to put aside some of their preconceptions about equity finance and have the confidence to plan for growth with an informed and open mind. It all starts from there.
As a starting point, construction businesses seeking growth capital should consider four important factors to determine whether equity finance is the right fit for their business:
- Price – The cost of funding will be an important issue. What will you be required to pay to secure finance, and when will you need to do so? That might be the headline interest rate to be repaid monthly over a fixed term in the case of debt finance, or the stake in the business that you offer to an equity investor and the dividends that are paid to them once the cash exceeds the capital needs of the business. Bear in mind that the cheapest option will not necessarily be the best one for your business.
- Service – Are you looking for a no-frills arrangement or something more sophisticated? One important aspect of funding for many growing businesses is the additional support investors can provide – financial and operational advice, access to new networks of potential customers or suppliers, or possibly introduction to a highly experienced independent non-executive director. The proactive contribution is typical of the equity investor but won’t be available with all funding options.
- Alignment – Relationships with suppliers work best when their interests are aligned with your own and finance is no different. Think carefully about this as you talk to potential investors. For example, if you don’t want to cede control or exit the business in a three to five-year time frame, a private equity backed management buyout is probably not for you. If long-term support is required through the ups and downs of the business cycle, a bank loan with restrictive covenants is likely to be the wrong choice too. Equity investors are taking a calculated risk on the future success of your company and as such are focused on its growth potential. The relationship between management and equity investors is one of partnership.
- Quality – This is ultimately determined by the extent to which the finance matches your needs. You need to feel confident that it is of the right quality and in reliable supply. Don’t be afraid to take up references. Putting the right capital structure in place is critical to the long-term success of your business.
In summary, growth comes in many different forms and so does the means to fund it. It doesn’t always need to be debt alone. For many businesses equity finance is an option that should be seriously considered.
Andy Gregory is north west regional director of Business Growth Fund. For more information go to www.bgf.co.uk.
