Business Leader Magazine – Money Supplement: August/September 2021

A SPECIAL PUBLICATION BY BUSINESS LEADER MAGAZINE

The Business Leader guide to funding growth in your business businessleader.co.uk

CONTENT

7 EDITORIAL Oli Ballard - Director E: oli.ballard@businessleader.co.uk Barney Cotton - Digital Editor E: barney.cotton@businessleader.co.uk James Cook - Content Manager E: james.cook@businessleader.co.uk DESIGN/PRODUCTION Adam Whittaker - Senior Designer E: adam.whittaker@businessleader.co.uk SALES Sam Clark - Head of Awards Sponsorship E: sam.clark@businessleader.co.uk Emma Filby - Head of Advertising E: emma.filby@businessleader.co.uk

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ACCOUNTS Jo Meredith - Finance Manager E: joanne.meredith@businessleader.co.uk MANAGING DIRECTOR Andrew Scott - Managing Director E: andrew@businessleader.co.uk

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FUNDNG NEWS

Global venture funding hits alltime high in first half of 2021 with $288bn invested

Data shows £79.3bn of CBILS loans given to 1.67 million businesses New statistics show businesses across the UK have benefitted from 1,670,939 government-guaranteed loans worth £79.3bn. These loans helped support their cashflow during the crisis through schemes delivered by the British Business Bank.

Recent numbers from Crunchbase show that in the first half of 2021 global venture capital funding broke records as more than $288bn was invested worldwide.

This is up by just under $110bn compared to the previous half-year record was set in the second half of 2020.

Business Money believes that these numbers demonstrate that there has never been so much funding available to companies in all stages of the growth cycle. Furthermore, the pandemic has only paused many economies, including the UK, and that there is more than enough liquidity in the economy to fund entrepreneurial ideas.

Crunchbase says that the backdrop for all of this activity in the venture ecosystem is strong first-quarter earnings for leading technology stocks as countries slowly emerge from the pandemic. On July 2, both the S&P 500 and the Nasdaq composite index hit all-time highs.

Crunchbase numbers also show that global venture funding in the first half of 2021 surged 61% compared to the prior peak of $179bn in the second half of 2020.

That’s up 95% compared with the first half of 2020, when venture investors deployed $148bn globally.

This includes 1,560,309 Bounce Back Loans worth £47.36bn, 109,877 loans worth £26.39bn through the Coronavirus Business Interruption Loan Scheme and 753 loans worth £5.56bn through the Coronavirus Large Business Interruption Loan Scheme.New figures for the Bounce Back Loan Scheme Top-Ups reveal 106,660 loans have been approved worth £950m.

The North West reports the largest usage of CBILS and BBLS (11%) outside London and the South East (34%), ahead of the East of England (10%). The data also provides analysis of loan uptake across sectors with construction (17%) and wholesale and retail (15%) receiving the highest proportion of total loans.

For CBILS, the manufacturing sector accessed a significantly higher proportion of loans (14%) than its share of the business population (5%), followed by wholesale and retail (17% v 9.2%).

For BBLS, the wholesale and retail sector accessed a significantly higher proportion of loans (15%) than its share of the business population (9%). The construction sector accessed the highest proportion of BBLS loans overall (17%).

First time funding for seed-stage start-ups is declining The number of first-time funding rounds into UK seed stage start-ups declined for a second consecutive year in 2020, to 36% below the 2018 peak for such deals, according to research by SFC Capital.

The data also points to reductions both to the amount of money available for first time rounds and the number of funds equipped to make such investments.

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FUNDNG NEWS

UK businesses raising funds at record rate as COVID-19 recovery comes into focus UK hiring accelerator, Playter Pay, has released new research showing a surge in investment for jobs creation.

Having analysed over 12600 fundraises in the last two years and comparing the figures of July 2020 to July 2021 with the same period 2019-20, Playter Pay revealed that the UK had experienced a 50% increase in investment gained in 12 months – an upsurge of £7.1bn.

Taking total business fundraising to £21.0bn in the last 12 months, from £13.9bn and the average fundraise from £2.19m to £3.56m.

Perhaps most surprising of all in a time of pandemic is that across sectors and geographical regions, much of this investment has been used for hiring purposes.

Across the board, the number of companies planning to use investment funding for hiring purposes increased by 24% in the last year and totalled some £1.68bn of investment, 8% of total funds raised.

Demand for debt finance on the rise in the North West

Triodos Bank tops global table for financing of clean energy projects Bevis Watts - CEO, Tridos Bank

Triodos has topped a global league table for most clean energy deals executed by a bank, after financing more than $433m in 2020.

With a total of 69 deals across Europe, Triodos took the title of ‘Most Active Lead Arranger’, incorporating traditional renewables such as onshore wind, solar and hydro, alongside EV charging, battery storage and energy efficiency projects.

35% jump in ‘buy and build’ deals Almost nine in 10 (89%) of small business finance advisors in the North West say that additional debt finance will be required by smaller businesses as a result of the COVID-19 pandemic, according to a new study from Ipsos MORI and the British Business Bank, published today.

Demand for finance in the region is seen as strong across all smaller businesses in development stages.

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The number of private equity (PE)buy and build transactions in the UK soared by 35% during 2020, as PE houses looked to bolster their portfolio during the COVID-19 pandemic, according to research by Rickitt Mitchell.

The analysis, in partnership with Experian Market iQ, reveals that a total of 370 bolt-on transactions were completed in 2020 – up from the 276

seen over the previous year. Despite a rise in volumes, the total value of transactions fell by a small portion over the last year. £1.2bn of deals were completed in 2020, just lower than the £1.3bn seen in 2019, which further highlights the trend of bolt-on deals during this period, which typically have smaller average values than other deal types.

August – September 2021

FUNDNG NEWS

£216m of funding now available to SMEs

Gross lending to SMEs stands at £7.6bn in first quarter of 2021

Propel, an independent asset finance provider, has announced two further financing tranches from the British Business Bank to add to its existing ENABLE Funding facility. The total facility will allow more than £216m of finance to be provided to SMEs across the UK. This is now one of the largest facilities under the Bank’s ENABLE Funding programme, which aims to improve the supply of finance solutions for business-critical assets to smaller UK businesses.

Mayor of London’s fund to commit £20m to support underrepresented entrepreneurs © Greater London Authority

According to UK Finance, which provides a regular analysis of how the finance needs of small and mediumsized enterprises (SMEs) are being supported through lending from mainstream lenders, gross lending to SMEs was £7.6bn in 2021 Q1, lower than last quarter but higher than prepandemic norms.

Figures from UK Finance also show that gross lending in 2020 from traditional banks was around £63.5bn, compared to £24.2bn in 2019.

The Mayor of London, Sadiq Khan, has announced that the Greater London Investment Fund (GLIF) will commit at least £20m of its capital to businesses led by female, ethnic minority or disabled entrepreneurs.

The commitment represents 20% of the total £100m fund, and the London Mayor says it will help to address the barriers faced by underrepresented entrepreneurs in accessing finance across the capital.

For the first quarter of 2021, traditional banking lending currently stands at £7.5bn, compared to £5.5bn in the first quarter of 2020.

Stephen Pegge, Managing Director of Commercial Finance, said: “In the first quarter of 2021, the lending environment was broadly stable.

Gross lending was elevated compared with prepandemic levels, but had tapered back from the peak seen last summer.

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“Ahead of the economy reopening businesses were continuing to meet their finance needs with a combination of ‘business as usual’ lending and that still on offer through government-backed schemes.

“SMEs continue to have facilities available through overdrafts and IF/ABL products, which should offer some financial flexibility to businesses managing the restart.

“While the economic picture is looking more positive, we expect a multispeed recovery across different segments of the economy.

“This will drive differences in future demand for additional finance, debt repayments and growth plans across businesses.

“The financial services sector will work across these groups to provide the right support through normal lending channels and RLS, to those that need it as the economy reopens and the recovery gains traction this year.”

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IPO

To float or not to float?

Business Money runs the rule over the public markets and the benefits of listing Deliveroo, Darktrace and Moonpig are just some of the businesses that have listed on the London Stock Exchange (LSE) in 2021. This year also saw WISE, formally known as Transferwise, see its valuation hit more then £8bn following its listing in July, in what was the biggest float of the year and the capitals largest ever tech listing.

Scott McCubbin EY Partner & UK&I IPO Leader

Sam Smith CEO FinnCap Group

Christopher Raggett Co-Head of Corporate Finance FinnCap Group

But what does the prognosis look like for the markets and what are the benefits to looking at listing as a funding option?

Business Money Investigates...

UK listings experienced a very strong start to the year, with more funds raised in the opening quarter of 2021 than in any other opening quarter since 2007, and the most raised in a single quarter since 2014, according to the latest EY IPO Eye. Both the main market and AIM built on the resurgence of activity seen in the second half of 2020, with 12 IPOs raising £5.2bn on the main market and eight IPOs raising £441m on the Alternative Investment Market (AIM).

First quarter fund raising achieved a total of £5.6bn, more than half of the £9.4bn raised in the whole of 2020.

Total funds raised in 2021’s first quarter were the largest of any opening quarter since the £5.8bn of new money raised in 2007 and the most raised in any quarter since the £6.9bn raised in the second quarter of 2014.

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August – September 2021

IPO

The performance during the first three months of 2021 is in stark contrast to the same period in 2020, when there were just three IPOs on the main market and two on AIM, which raised a combined total of £615m – a value nine times lower than this year’s opening quarter.

Scott McCubbin, EY Partner and UK&I IPO Leader, comments: “The UK has had the strongest opening quarter for IPOs for 14 years, with the markets successfully weathering the effects of Brexit and bouncing back from the stall in activity caused by the onset of the pandemic a year ago. With an effective vaccine rollout underway, momentum and confidence in the UK IPO market should continue to build, but future growth may vary depending on the sector.”

THE UK’S STATUS AS A TECH MARKET The first quarter of 2021 also saw the release of the findings of the Government-backed Hill Review of the UK listings regime, with a view to ensuring the UK markets remain competitive on the global stage. The first recommendation is currently out for consultation by the Financial Conduct Authority. In the first week of the second quarter, the UK hosted its biggest tech listing on record.

Scott adds: “Given the tech sector is of increasing importance for both the IPO market and wider economic growth, the UK’s ability to attract tech IPOs is likely to be under scrutiny. The reputation of the UK as a tech IPO market will in part depend on the performance analysis of listings that fall within this broad sector, which includes both traditional tech companies and those that heavily rely on technology. Investors will be looking carefully at a range of factors, with a keen focus on issuers’ business models, governance and use of proceeds – all indicating that robust preparation is key to a successful IPO. “Such a positive performance in the first quarter shows confidence in the strong fundamentals of the UK IPO market.

While some believe there is a risk of compromising on current strengths if the UK seeks to adapt to bolster its tech status, the UK would likely have to make some significant changes if it were to rival the US in this area. The Hill Review is a positive step forward for the UK’s future in tech.”

BENEFITS OF LISTING So the fundamentals look good, and the IPO market looks buoyant. But, what are the benefits to listing for a business that is applicable?

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Sam Smith is the CEO of FinnCap Group. An expert on public markets, she spoke to Business Money this year about the benefits of accessing markets.

One of the standout reasons business leaders decide to go down this route is because they can retain a certain level of control in the business, compared to the exit or private equity route.

Sam explains in more detail: “Firstly, despite doubts raised by the proliferation of alternative funding sources, listed markets remain a vital resource for companies seeking scale-up capital to finance their growth. Their importance will endure as growth companies look to follow in the footsteps of firms such as Apple, which listed in 1980 with a market capitalisation of just under $2bn, and which was valued at more than $1tn on the eve of the pandemic.

“Moreover, the continued popularity of secondary equity offerings speaks to the ongoing vitality of listed markets, even while IPOs have been in abeyance. On AIM, for example, £3.8bn was raised through further issues last year alone, with more than £70bn raised in secondary equity offerings since AIM was established in 1995.”

Sam continues: “Public markets also offer a level of liquidity which private markets cannot match and, perhaps even more importantly, they provide an unparalleled platform for profilebuilding, which is invaluable for companies looking to float. For instance, FTSE 100 firms are not just some of the UK’s largest businesses, they are also household names and authoritative voices on trends within their respective markets. Whereas private transactions offer less visibility, IPOs provide a far wider pool of investors and potential customers.

“With this higher profile comes a level of scrutiny which may be off-putting for some executives, but nowadays, it is vital for companies to hold themselves accountable to increasingly rigorous regulatory standards. ESG issues from carbon emissions to equal opportunities already figure highly on stakeholders’ agendas, and this trend will only gather momentum in the wake of the pandemic. Public offerings are, therefore, more conducive to highlighting the key ingredient of a corporate conscience.

Cont. 

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IPO “Under current rules, start-ups must sell at least 25% of their company in a listing, which may discourage owners concerned about selling too much of their business, while present restrictions on the use of dual-class share structures have prompted firms such as Just Eat to shift shares and liquidity abroad in recent times. But compared to other options, owners will have much more control.”

NEVER TOO EARLY TO START A CONVERSATION Christopher Raggett, who is Co-Head of Corporate Finance at finnCap Group, believes that it’s never too early to start thinking about how you prepare your business for an IPO. He says: “Listing shouldn’t be a snap decision and doing so is a serious endeavour, and you need to put in the plumbing early and achieve good corporate governance, so you look and feel like a grown-up company. It’s important to also have a good board, which is well balanced between execs and non-execs.

“It can help to have somebody in the team who is just focused on governance and preparing the business for a float. Board composition is playing an ever-increasing role in the process and we’re also seeing more founder protection too, whereby the founders can be protected against a hostile takeover, and this is important because for many leaders, the business is their baby. If you get your preparation right, listing can give you control and access to serious funding.”

WHERE TO LIST? Knowing where to list can be something leaders need to think about too. Maxim Manturov is Head of Investment Research at Freedom Finance Europe.

He has spoken recently to Business Leader about the rise in e-commerce retailers looking at listing as a funding option and the importance of selecting the right option.

He says: “It’s important retailers and businesses understand the advantages and disadvantages of going public. The main benefit of a business entering the stock exchange will be the capital raised for the company’s further development and, in general, entering the organised and liquid capital markets; in the future, it will help a company raise capital for further development quickly. Also, the stock placement itself can be a ‘major’ advertisement for the company. Among the risks are lawsuits or bad reviews, which can negatively affect the company’s stock price.

“Finally, it’s important you make the right decision when choosing what stock market to trade on – from AIM to LSE, the choice is a difficult one to make. Generally, the best choice for investing is the US exchanges, specifically Nasdaq, which became the leader in the number of placements in 2020, raising approximately $57.3bn.” 

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The business perspective - PensionBee One of the 2021 floats has been PensionBee. To find out why they decided to float and how they’ve benefitted, Money spoke to its CEO Romi Savova.

WHY DID YOU DECIDE TO IPO AND HOW HAVE YOU FOUND THE EXPERIENCE?

Romi Savova CEO, PensionBee

Making the transition from being a private company to a publicly traded company was always part of our strategy to be the best online pension provider. We knew it would enable us to access capital, so we could further develop our customer-focused proposition and extend our reach to millions of consumers across the UK, whilst continuing to use our voice to make positive changes in the pensions industry.

There is a significant growth opportunity for PensionBee, as a result of the acceleration of the shift to digital and the frequency of individuals moving jobs, combined with the ever greater need for financial wellbeing. Our estimated market share is currently around 0.4%, which means there’s huge opportunity for us to grow and continue to work towards our mission of making pensions simple, so everyone can look forward to a happy retirement.

Our IPO marked the culmination of seven years of hard work, and is testament to the dedication the PensionBee team shows to helping our customers each and every day. It was particularly exciting to take customers with us on our journey, and we were thrilled that so many wanted to take part in this phase of our growth by applying for shares in our customer offer.

WHAT ADVICE WOULD YOU GIVE TO OTHERS, WHO ARE CONSIDERING AN IPO? The London market offers companies significant advantages, including the opportunity to stand out on the highly respected London stage. For us, there was simply no other choice as the UK is where we operate and where our customers are based. It’s also home to some of the world’s leading technology companies and a world class exchange with high standards of governance. 

August – September 2021

R&D TAX

Funding that rewards innovation

To find out more about R&D tax credits as a funding option for businesses, Business Money spoke to Jenny Tragner CA ATT, Technical Director at R&D tax relief consultancy ForrestBrown.

How do I know if I’m eligible for R&D tax credits? What is this tax relief?

Research and development (R&D) tax relief is a government incentive designed to reward UK companies for investing in innovation. It’s a valuable source of cash for businesses to invest in accelerating

their R&D, hiring new staff and, ultimately, growing.

To protect your business, always work with a regulated R&D tax adviser.

Companies that spend money developing new products, processes, or services, or enhancing existing ones, may be eligible for this relief. R&D tax relief reduces a company’s Corporation Tax liability or provides a cash payment. If a business is making a claim for the first time, it can typically claim R&D tax relief for its last two completed accounting periods, if it meets the criteria.

Any trends you’re seeing in this space?

In his Budget 2021 address, Rishi Sunak announced a wide-ranging consultation into tax relief on private-sector R&D investment in the UK. It explores how this investment is supported or otherwise affected by the R&D tax relief incentives, and where changes may be appropriate.

This is something to watch in the coming months – not least as HMRC is currently undergoing a seismic shift in its approach to the incentive to reduce errors and fraud.

Is this relief just for traditional sectors or are you seeing a broadening of the types of businesses that can apply?

Despite some misconceptions, this incentive always has been available to any sector. From cheese-making to chemical engineering, to construction and digital development, R&D can occur and apply equally to any field of science or technology.

A word of warning, there’s a lot of misinformation swirling around regarding the types of projects that attract relief, particularly from opportunistic, spurious advisers looking to take advantage of companies who may have made adaptations in response to the pandemic.

For example, we’ve recently seen spurious agents advertising to sectors unlikely to be R&D intensive, such as care homes and restaurants.

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As well as bolstering their R&D compliance team with 100 new staff, HMRC has started challenging SME R&D tax relief claims for customer-led R&D projects, on the basis that this R&D is subsidised by customers. As a result, businesses need to be more aware of the impact of their contractual arrangements on their R&D claims.

Software is a sector that HMRC is particularly concerned about, using its own software specialists to vet claims, and sending letters to some companies asking them to check their own claims for accuracy. We’re, therefore, placing enhanced importance on sector expertise to help clearly define project boundaries and articulate the R&D, while also ensuring relevant costs are captured. 7

R&D TAX CREDITS

INTERVIEW

Government lends a helping hand with post-COVID finance The world of business finance can be a minefield, particularly during the last year and a half. The government’s response to COVID-19 was to offer businesses a range of options, including grants and loans and more traditional finance methods such as crowdfunding.

We caught up with two tax and finance business specialists from R&D provider Access2Funding about where the land lies when it comes to alternative business finance and what the future may hold.

Kieran Newton works as a tax specialist in the southern England and Northern Ireland regions. He has a wealth of knowledge, including the likes of corporation tax for SMEs and personal tax for high net-worth individuals, as well as corporate tax planning and restructuring. He was an accountant for six years where he built up a broad range of experience in audit.

Chartered Institute of Taxation member and fellow tax specialist Leslie Maloney works across the North West. Leslie joined Access2Funding from a role as Director at a top 20 accountancy firm. He has a chemistry degree gained from Oxford University and has worked across several roles in tax, audit, corporate finance and tax planning.

out of the restrictions that have affected everyday life, it’s fair to say we aren’t out of the water yet. This could mean some businesses will need to repay these loans but could still be struggling financially.”

What options do businesses have when it comes to repaying these loans if they may be struggling?

Kieran Newton: “There is a new Recovery Loan Scheme for businesses which means business owners are eligible to re-finance existing CBILS and Bounce Back loans.

However, there are no more 12-month Business Interruption Payment schemes in place from the government so that means repayments are usually immediate, unless stated otherwise by the bank.

“The main advantage of these over ‘normal’ loans is that there is a government guarantee to the bank, to encourage lending, but it’s worth remembering that the borrower is always at risk first for the full amount.”

Can you describe some alternative methods of finance to help with cashflow?

Leslie: “The R&D Tax Relief Scheme is a government initiative, created to reward

and encourage UK companies to invest in innovation. Businesses could be sitting on thousands of pounds in hidden funds, simply for carrying out their day-to-day tasks! We’ve worked with clients over the past year that have discovered R&D and it’s actually helped them to keep th doors open.”

Kieran: “This scheme is often underutilised and maybe misunderstood. To put it simply, to be eligible to claim R&D tax credits, businesses must be UK registered and liable to pay corporation tax. SMEs must have under 500 employees and either under €100m turnover or €86m on the balance sheet. R&D is assessed in Euros rather than GDP as it was written by the European Commission but is not linked to EU funding.”  From manufacturers to food and beverage suppliers, many businesses may not realise they are eligible for R&D. To find out more about R&D tax credits from HMRC, contact hello@access2funding.co.uk or visit www.access2funding.co.uk/

What changes can businesses expect to see with regards to finance in the coming months?

Leslie Maloney: “As we all know, because of COVID-19 many businesses needed help with finance to continue to trade during the last year. The two main schemes were the government’s Bounce Back Loans and CBILS Loans – on both of which, repayments of debt and interest will shortly start to be needing to be paid.

Although the country is slowly coming 8

Kieran Newton Tax Specialist Southern England & Northern Ireland

Leslie Maloney Chartered Institute of Taxation Member & fellow Tax Specialist

August – September 2021

INVESTOR PERSPECTIVE

Investors reveal secrets to gaining the funding you need To help readers understand how they can best prepare a funding pitch, Business Money spoke to a collection of high-profile investors and funders to gain an insight into best practice.

The type of funding you’ll need will differ to when you’re starting a business and to when you’re in scale-up mode. The conversations, funding lever you’ll select and who you’re talking too will change. But the fundamentals of best practice when pitching for funding tend to stay the same.

Firdaus Nagee is an investor, and he is also the Founder of successful scale-up business FCI London.

His tips for approaching an investor are as follows: “The actual numbers and projections are key. Often entrepreneurs can spend too much time on snazzy looking decks but when you get to the nuts and bolts and what is your cost per acquisition, for example, and what is your runway to profit; and what is your CTR and digital marketing plan; then they do not have the answers.

TIPS FOR DEALING WITH ANGEL INVESTORS One of the funding options when starting your business is to connect with an angel investor – an individual who will typically invest in multiple businesses.

model and proof of HMRC (S)EIS advance assurance and a proposed term sheet. By being prepared with these four items you remove stop-start from the funding round and dramatically increase your chance of landing investment.

At this stage of the funding process, which will be the first time that many entrepreneurs have raised, there are some key things to consider.

“You also need to understand what you want from your angels – is it just cash, cash-plus industry experience or cash-plus a Non-Executive Director; or event cashplus routes to market for your product or services. Finding passive investors who ‘invest and forget’ is relatively easy but finding investment capital and one of the other items significantly reduces the number of investors who could invest.”

Sam Simpson is the Founder of Catalyst.

He’s also a serial entrepreneur and one of the UK’s leading angel investors.

He says: “Founders only have one shot with an investor, so it is best to engage when they are fully prepared with a polished pitch deck which has been reviewed and polished by some friendly angels, a forecast

“Rather than just saying it is a £1.5bn market and we are going to do this and then that – I think it pays to be clear and humble about what you are going to do with the funding.

You need to be very specific about where every single penny is going to be spent.

“For a final point, you also need to try and work with funders that love what you do and who you are and investors that will cheerlead for you.”

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August – September 2021

INVESTOR PERSPECTIVE

Touker Suleyman Dragons Den Star

Firdaus Nagee Founder FCI London

Sam Simpson Founder Catalyst

Sam also says that going out and getting as much experience as possible is important. He explains: “Finding angel investors is a numbers game. It is key to get your pitch deck in front of as many investors as possible and make their experience as positive as possible.

“Lots of angels won’t even look at an investment until advance assurance is in place because 30% or so of advance assurance applications fail, so why would an angel spend time considering your opportunity if there is a one in three chance that you won’t be investable anyway.”

“Artificial intelligence (AI) are still very prevalent but seasoned angels will dig into claims of AI implementations because they will have seen dozens of pitch decks claiming to be an AI play but, they aren’t.”

“FINDING ANGEL INVESTORS IS A NUMBERS GAME. IT IS KEY TO GET YOUR PITCH DECK IN FRONT OF AS MANY INVESTORS AS POSSIBLE AND MAKE THEIR EXPERIENCE AS POSITIVE AS POSSIBLE.”

The trends Sam is seeing in the space, aren’t too surprising either.

He says: “Unsurprisingly, many angels are seeking ‘Corona resilient investments, so anything travel, or hospitality related is a tough sell; and blockchain is no longer being forced into every pitch deck, thankfully.

Sam Simpson

WHAT DO THE DRAGONS SAY? Whilst not always a depiction of the true reality of investing – and with investments in the thousands not the millions of pounds – the ‘Dragons’ also have some

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interesting insight when it comes to how to prepare a pitch.

And it’s not surprise that not knowing the numbers is a big no-no.

When asked what puts him off from making investment, Touker Suleyman says: “When somebody does not know their numbers and thinks they can pull the wool over your eyes. You will start to ask questions and it will all unravel quickly, so there is no value in trying to do this. Silly valuations are frustrating too and some of them are crazy. Some of them are picked out from the sky.”

James Caan CBE, who also appeared on Dragons’ Den, says that showing you can execute the idea you want funding for, matters too.

Cont.  11

INVESTOR PERSPECTIVE He says: “In business, it can be common for an entrepreneur to think that because they have a good idea, they will become a millionaire. The idea only counts for 5% of the opportunity though and sometimes people can think it is 95%. The real success in business is not an idea, but the ability to execute the idea.

“We all have ideas every day, but they do not come to anything and success happens when you can turn an idea into reality; and I’m looking for somebody who does this. I also look for somebody who demonstrates leadership skills. It is not about you in a business, but who you surround yourself with, and you need to have gravitas and charisma to attract good people.

“Finally, I look for somebody that has a commercial mind. A big reason for a business failing is that it will run out of cash. I am not looking for an accountant but somebody that is commercially savvy.”

ACCESSING LATER STAGE GROWTH CAPITAL This is all sound advice but what about when you must access growth stage capital and you’re looking for investment in the millions of pounds.

James Caan CBE Dragons Den Star

Giovanni Nani from Frog Capital – who specialise in the growth opportunity between venture capital and private equity say: “For entrepreneurs looking to raise an early stage round of funding, there is plenty of good advice available on how to pitch and position a start-up.

But, when it comes to pitching a scaleup business to raise later stage growth capital, the resources publicly available to CEOs to help you prepare for that process are somewhat scarce.

“Pitching for late stage funding is different.

The company is at a different stage of development, and late stage Investors look for different signs of potential.

Understanding the process and getting the pitch right (e.g. the narrative, the metrics, the deck, etc.) is critical. These need to be tailored from stage to stage to factor in the specific audience requirements. That does not mean writing a pitch that over-caters to investors, rather adjusting it to ensure it speaks their language with the appropriate tone of voice and focus on key topics.

“Some elements of a good pitch are universal, but zoom in on the later stage fundraising and you’ll see there are some key pitfalls to avoid. The following considerations will help ensure your pitch resonates with growth investors.”

UNDERSTANDING INVESTORS Giovanni explains: “Ask yourself, ‘How can I make it easy for them to make an investment decision?’

“Growth stage investors will be listening for different things than early stage investors. While their equation for building conviction around an investment may have the same variables (i.e. team, market, traction, etc.), their coefficients are often different. A pitch that reflects the growth stage investor’s mindset will make it easier for that investor to assess the opportunity.

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“Often later stage investors have a corporate finance/professional investing background, whereas earlier stage investors are more likely to have operational/start-up experience.

“Their diverse backgrounds will likely influence their expectations and investment mindset.”

DON’T JUST UPDATE A SERIES A DECK Giovanni continues: “In an interview, Bill Reichert, Managing Director at Garage Technology Ventures, says the fundamental difference between early stage and late-stage pitching is this: selling a dream vs. selling an operating company and your ability to execute your plans.

“The experience gained in raising seed and Series A rounds is certainly valuable, but the differences of what is expected at Series B or later must be well understood.

“The set of numbers, metrics and evidence that a later stage investor will want to see is greater. History and track record are key to demonstrating sustainable growth potential.

“Expect more data driven discussions and more ‘difficult’, forensic questions. Late stage investors will look to be convinced by data at a more granular level, not just by the bigger picture vision.

“Demonstrating a keen handle of KPI monitoring helps create a sense of control.

Investors will want to see that you have got the discipline of having a metrics dashboard in place for several quarters and they will expect you to be tracking against specific performance metrics.”

EFFECTIVE PITCHING Giovanni concludes by talking about the pitch itself: “If you are raising a later stage funding round, most likely you will have an existing set of investors onboard already. Leverage their knowledge and experience, A/B test with them, get input and feedback.

“For a company at the scale-up phase, you are typically expected to have senior management team in place (or at least an initial form of it). Carefully choose the team around you that will support you in the presentations and will attend meetings. That should typically reflect the way that the company is run day-to-day.” 

August – September 2021

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DEBT VS EQUITY

Andrew Boyle CEO LGB & Co

Bill Nixon Managing Partner Maven Capital Partners

John Garner Head of new business LDC

Debate: Is taking on debt or giving away equity the best way to fund growth?

If you’re a business leader looking to fund future growth plans, deciding whether to take on debt or equity can be a key decision. To help unpick the subject, Business Money spoke to experts in the space.

WHAT ARE THE BENEFITS OF SELECTING DEBT AS AN OPTION TO FUND GROWTH IN YOUR BUSINESS? Andrew Boyle – CEO, LGB & Co: “Debt is a bridge to future cash flows. Companies facing short-term business interruptions or those expecting returns from CapEx or acquisitions can, therefore, consider debt as a financing option.

“Nevertheless, these companies should ensure they have an appropriate repayment profile for their businesses and balance sheet. Given the experience 14

of the last 18 months, all assumptions about business performance should be tested rigorously before debt obligations are taken on. Short-term options could be using an overdraft or invoice discounting, while longer term options might be a term loan of four to five years.

“The principal benefits of debt are its relatively low cost and the avoidance of equity dilution. However, the choice of lender is important in case flexibility is required. The cheapest option, or at least the one with most certainty, can be borrowing from a bank or credit fund.”

WHAT ARE THE TRENDS SHAPING THIS SPACE THAT BUSINESSES SHOULD KNOW ABOUT? Andrew Boyle: “To some extent government assistance to companies through CBILS and Bounce Bank loans, and through furlough and grant payments, has crowded out private sector lenders.

Many credit funds are struggling to fulfil their mandates and banks are offering

better terms. Companies that can present robust business models and strong management teams should be wellpositioned.”

WHAT ARE THE BENEFITS OF SELECTING EQUITY INVESTMENT AS AN OPTION TO FUND GROWTH? Bill Nixon – Managing Partner, Maven Capital Partners: “With SMEs taking on an estimated £80bn of debt during the pandemic from both GovernmentAugust – September 2021

DEBT VS EQUITY

backed loan schemes and VAT deferrals, additional debt is unlikely to be the sole answer as companies will need funding for further growth to service and eventually pay off their increased debt levels.

range of available funding options open to them, such as family and friends, family offices or investor syndicates, experienced private equity firms offer distinct advantages.

“Listed companies have the option of raising additional capital through share issues, which they have been actively doing – close to £30bn was raised on public markets by companies last year.

However, for private businesses, of the

“Research by Stanford University also highlights the broader benefits that private equity can provide businesses. Private equity-backed firms suffered a significantly smaller decline in value than comparable sized firms in the 2008 financial crisis,

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while they also increased their assets more rapidly and enhanced their market share during the crisis. This greater resilience owed much to better access to financing resources, largely thanks to the ‘dry powder’ of unspent capital available to private equity firms, as well as the benefits of the commercial and market insight of working with experienced private equity investors.”

Cont.  15

DEBT VS EQUITY

John Garner – Head of New Business at LDC: “For me, I feel that private equity can help business leaders to grow their company more confidently and quickly, without losing control.

“All of the business leaders we back know they want to grow their business, and most have a variety of different options open to them; they know the new markets they could enter, the new products they could develop and the competitors they could acquire.

“The right private equity partner can enable this growth through direct expertise, connections, focus and a willingness to invest in the businesses they back.”

“THE KEY ADVANTAGE OF EQUITY CAPITAL, BESIDES THE ABSENCE OF REPAYMENT TERMS, IS THE ABILITY TO OFFER PRICING THAT COULD BE ATTRACTIVE IN BOTH POSITIVE AND NEGATIVE CIRCUMSTANCES.” Andrew Boyle

16

Andrew Boyle: “Equity capital is a reserve to be used to support a company through difficult periods and to fund capital investment when the pay-back period is uncertain. Companies that have experienced fundamental change during the pandemic or weakened balance sheets will require more than a bridge to expected cash flows. In such cases, equity capital, rather than debt, would be appropriate.

“The key advantage of equity capital, besides the absence of repayment terms, is the ability to offer pricing that could be attractive in both positive and negative circumstances.”

WHAT ARE TRENDS SHAPING THIS SPACE THAT BUSINESSES SHOULD KNOW ABOUT? Andrew Boyle: “The pandemic has hurt some sectors, such as leisure and travel, while it has caused capital to rush into other sectors, notably healthcare.

Management teams should recognise the positioning of their businesses. They should strengthen financial models in weakened sectors and find applications for their know-how in business areas that have a following wind.

“Similarly to debt, monetary policy has increased the surplus of capital available

for investment in equity. The prospect of tax rises is supporting fundraising by VCTs and IHT-exempt products. We have also seen oversees institutions participating in issues of equity by quoted and private UK companies on a relative value basis.

Demand for AIM IPOs and secondary placements has been strong, although the holiday period and uncertainty about continuing COVID-19 regulations has caused some recent issues to be cut back and repriced.”

John Garner: “The two biggest trends we are seeing in the market right now are international expansion and market consolidation. International growth is being facilitated by developments in new technology and business services, which means it is easier than ever to sell and supply your products or services anywhere in the world.

“Market consolidation is relevant for those wishing to consolidate a fragmented market where scale confers a business advantage, those wishing to acquire new products and those wishing to enter new markets. It’s a powerful strategy for both building scale as well as resilience.

And one where private equity backing can supercharge the efforts of business leaders as well as mitigate risk.”  August – September 2021

Why businesses need local lenders like BOOST&Co to build back better After Covid-19, growth loans are providing a vital alternative to the banks, says new principal Chris Mears Businesses need help to recover and grow following the coronavirus pandemic, but what are the best ways to provide that support? Lenders often believe that they can understand local markets from an office in London, but the alternative lender BOOST&Co is helping SMEs by appointing principals who are part of the business communities in which they work.

Bigger loans than the banks The lender recently expanded into Birmingham, Reading and Leeds, as well as strengthening its offices in Manchester, London and Bristol. “Firms are struggling in a confused funding environment, so my role is to explain that there are powerful alternatives to traditional funding,” says new Bristolbased principal Chris Mears, who has been supporting companies in the area for 17 years.

Mears believes that innovative businesses need bespoke funding tailored by local experts – exactly what BOOST&Co’s growth loans, from £1m to £10m, are designed to provide. “We invest more and earlier than banks because we consider a firm’s growth rate, not just its history. We assess the quality of the management team and the company’s potential, before looking at how to scale the business without harming its profitability,” he says.

Flexible funding that meets your needs Growth loans can be used to support a number of needs, including acquisitions, expanding into new countries or investing in facilities, operations or staff. The process is smooth and swift, facilities have few covenants and the lender does not take seats on companies’ boards. So, as the UK economy begins to recover, a growth loan could be the wisest way for your business to take the next step.

Get in touch at boostandco.com

EQUITY INVESTMENT

Buoyant UK equity market Following a year of macroeconomic volatility in 2020, the UK’s equity market has never been more buoyant than in 2021.

To delve deeper into the subject, Hannah Skingle from Beauhurst, provided this analysis.

18

Headline investment figures In the first six months of the year, a record £10.7bn was deployed to UK start-ups and scale-ups – that’s more than double the amount raised during H1 2020 (£4.84bn), and an 84% increase on the previous record in H1 2019 (£6.69bn). A record 1,296 deals were announced, marking an 11% rise since H2 2020, and a 24% rise from H1 2020.

Fundraising activity was slightly weighted towards Q1, with £5.45bn invested across 698 rounds, whilst Q2 saw £5.23bn invested across 598 rounds. Still, individually, both quarters saw a greater

volume and value of deals than any prior period.

We’ve also seen more pounds invested during H1 2021 than in the whole of 2020 (£10.5bn), and if investors continue closing deals at this rate, then we may see a doubling of funds deployed between 2020 and 2021.

Increasing deal sizes As the equity ecosystem matures, it's natural for deal values to increase over time. More companies are reaching the later stage of growth, where they require – and have the infrastructure – to take on August – September 2021

EQUITY INVESTMENT In association with Beauhurst, the research and database company tracking the UK’s fastest-growing start-ups and scale-ups.

£8.23m in 2021 so far. Just 44% of deals were less than £1m, compared with 54% in 2020.

Although deals are getting larger, H1 2021 also saw a very welcome uptick in first-time funding rounds, which landed on 384, compared with just 253 in H1 2020. If this level of activity continues throughout the remainder of the year, then 2021 could meet, or even exceed, the record 768 first-time rounds completed in 2014 – massively reversing a seven-year downward trend.

The most active regions Several regions saw record numbers of equity deals in H1 2021, including the East Midlands, the North East, and the North West. But it was the South West that saw the most dramatic increase in deal activity between H2 2020 and H1 2021, more than doubling, from just 34 to 75.

The most significant of these was unicorn company Graphcore’s £162m raise in January, followed by Immersive Labs’ £53.5m raise in June.

tens of millions of pounds within a single funding round. As of June, there had been 50 megadeals (rounds in excess of £50m) – 26 of which were worth more than £100m – already a 25% increase from the full-year figure for 2020 (40).

But deal values aren't just increasing at this extreme end of the spectrum. The median deal size increased across almost every stage of evolution during H1 2021, reaching record values across the seed (£400,000), venture (£1.59m) and growth stages of evolution (£10m). And across all stages of evolution, the mean equity round size has grown from £4.74m in 2020 to

Meanwhile, the South East saw deals increase by almost a quarter since H2 2020, from 109 to 134. So far this year, four of the five largest rounds in the South East have gone to life sciences companies, supported by Oxford’s world-class innovation ecosystem.

These include a £195m raise by Oxford Nanopore Technologies, a £162m round

by Exscientia, and a £121m round by Vaccitech – the company founded by COVID-19 vaccine pioneer Sarah Gilbert, that later went on to IPO on the Nasdaq market in April.

London remained the dominant UK region by quite some way, however, securing 635 equity deals in H1 2021, compared with 523 in the previous period, marking a 21% increase. The capital is on track to comfortably exceed the total number of deals it announced in 2020 (1,004), and it has already surpassed the total value of investments, currently standing at £6.90bn, compared with £6.77bn last year. Much of this can be attributed to those aforementioned megadeals, 70% of which were secured by London-based

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businesses. To put that in context, in H1 2021, an impressive 5.9% of deals in London were worth more than £50m, compared with 2.5% across the rest of the country.

The most successful sectors A range of tech sectors saw exceptional growth in H1 2021. COVID-19 has shone a spotlight on the life sciences industry, so it’s no surprise to see that innovative businesses operating in the sector are securing more investment than ever before. Collectively, highgrowth life sciences companies secured 88 investments during the half, worth a combined £1.42bn, which marked a 140% increase on the amount invested in H2 2020 (£591m).

And although the COVID-19 infection rate is now declining in the UK, we expect investor interest in life sciences to remain high over the coming months and years.

This is in no small part due to government intervention, with the UK Government recently laying out plans to make the country the most attractive location in Europe to start and grow a life sciences business. This includes a £200m Life Sciences Investment Programme via British Patient Capital.

But the golden child of the UK’s start-up scene, fintech, remains the best-funded sector in 2021, securing 157 deals, worth a combined £3.28bn. This means that, so far, 31p in every £1 invested this year has been deployed to fintech firms, and marks a 32% increase in the total amount secured by the sector throughout the whole of 2020.

Looking to the future Here at Beauhurst, we always had faith that the UK’s startup and scale-up scene was more than capable of surviving and thriving through the COVID-19 pandemic.

What we did not foresee, however, was such a strong rebound in investment activity within a year of the first lockdown measures coming into play. These figures are a true testament to the incredible innovation and talent being nurtured in the UK’s high-growth space.  19

INVOICE FINANCE

What is invoice finance and why is it a good funding option?

To find out more about invoice finance and why it can be a good funding option for businesses, Business Money spoke to Josh Levy – CEO at Ultimate Finance.

What type of businesses typically benefit from invoice finance and how is this funding structured?

The short answer is any business that sells to another business on credit. We believe the post-pandemic recovery phase could empower businesses to embrace manageable business debt in a way they have never done before. This is where nonbank lenders alongside financial brokers and intermediaries play an integral part.

Impartial and professional advice is more necessary now than it has ever been, particularly to businesses seeking funding for the first time or looking to establish the right long-term debt financing structure.

Businesses looking for an ongoing working capital requirement should consider invoice finance as a funding option, which uses the sales ledger as an asset to borrow money against. It is suitable for any business, whether they’re a limited company, a sole trader or a partnership. Waiting to be paid is a universal pain point for most businesses – regardless of their size or sector. An invoice finance facility offers a simple way to release the money you are owed in unpaid invoices, and it’s funding that, for most lenders, comes with dedicated relationship support and personal contact.

Businesses that can benefit span across many industries, including manufacturing, construction, recruitment, agriculture, transport, retail, telecommunication, technology, engineering, health food, and many more.

When you apply for an invoice finance facility, the lender will agree a funding limit based on several factors: your current turnover, the credit terms you offer your clients, but also your business requirements. They will also agree a prepayment percentage – up to 95% of the invoice value normally – which gets paid into your account as your invoices are raised. When your customers repay, you get the remaining balance minus the lenders fee. It’s a straightforward and flexible solution that helps keep your business moving.

What are trends you’re seeing in the invoice finance space?

Following a challenging 2020 for the Invoice Finance market, with a significant distortion from, and substitution to, the Government lending schemes, there is a returning demand and need for working capital funding solutions.

There is a very clear expectation that invoice finance has a key role to

play in helping SMEs restructure COVIDrelated debt and liabilities, and provide the necessary cashflow to support recovery and growth paths.

Market conditions have forced some lenders to reappraise their invoice finance strategies, which has led to portfolio sales, withdrawals from the market and strategic shifts from both high street banks and independent lenders.

Product innovation has been mixed in recent years, with a growing number of single/selective invoice finance players emerging as an alternative to traditional whole turnover facilities, but there has been an unwind of this trend recently with a number of those lenders gradually moving towards a more traditional product offering.

Digital adoption has accelerated over the last 18 months, with a focus on improving the customer experience and ease of facility use through automated payments and extraction of data feeds from banking and accounting systems. By providing easier and faster access to liquidity, we believe invoice finance can play an important role in supporting businesses on the road to recovery and growth. 

“BUSINESSES LOOKING FOR AN ONGOING WORKING CAPITAL REQUIREMENT SHOULD CONSIDER INVOICE FINANCE AS A FUNDING OPTION, WHICH USES THE SALES LEDGER AS AN ASSET TO BORROW MONEY AGAINST.” 20

August – September 2021

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ESG & FUNDING

One third of world’s capital committed to investing in sustainability The important of having a clear and deliverable ESG and sustainability strategy is becoming increasing important as a lever for businesses to attract funding. To find out more about this subject, Business Money spoke to Samantha Duncan at Net Purpose.

Is having ESG and sustainability credentials becoming more and more important for investors?

Absolutely. One third of all the world’s capital today, or $90tn, is now committed to investing sustainably or for impact.

This means a growing cohort of investors are optimising for environmental and social returns, alongside financial returns.

These investors are being driven by their clients who want their portfolios to be aligned to achieve global goals. It’s also driven by a recognition that companies are extremely well positioned to provide solutions to some of the world’s most pressing problems.

Do you feel this could almost become a mandatory requirement in the future?

Yes, and it already is! The European Union’s Sustainable Financial Disclosure Regulation (SFDR) was launched in 2019 and imposes significant reporting obligations on all investors offering financial products in Europe, not just sustainable investors. The regulation is designed to harmonize disclosure on sustainable investment products and set clear guidelines for what is and is not ‘sustainable’. Financial market participants who don’t assess adverse sustainability impacts are now required to disclose why.

What trends are you seeing around this space?

We are seeing the sophistication of investors on these topics improve. With this trend, we’re seeing an increasing demand for real quantitative performance data to measure social and environmental returns, as rigorously as we measure financial returns.

At a broader level, we now have a large portion of the world’s most sophisticated investors committed to acting on some of the world’s most pressing problems. This means the biggest trend is: that we have an enormous opportunity in front of us to invest to achieve a more sustainable world.

Environmentally-minded firms offer better returns for investors than polluting peers The stocks of environmentally-minded companies are a better bet for investors than shares in their polluting rivals, reveals a new study by the University of Sussex Business School and Birkbeck, University of London.

Companies with better-than-average environment performance gave investors better returns and lower risk than their competitors, the study by Dr Panagiotis Tzouvanas and Professor Emmanouil Mamatzakis found.

The study found on average a portfolio with the best-performing environmental stocks could have up to 7% superior annual returns than a portfolio with highly polluting stocks, while the risk of environmental stocks is around 30% less.

An investor who put $100 in 2005 into a green minded company whose environmental performance was 10% above their industry standard every year would get around $45 more back on their investment in 2018 than if they backed a polluting company whose environmental performance was 10% below the sector average, the study authors explained.

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August – September 2021

PATIENT CAPITAL

‘Google, Facebook and Amazon were all originally backed by venture capital’ To look at the funding lever of patient capital in more detail, Business Money spoke to Judith Hartley, CEO at British Patient Capital.

Companies should be typically seeking at least £1m, and often a lot more, have a defensible business model or technology and a plan or ‘roadmap’ for growth, even if in some cases the application of the technology they are developing may be unclear.

WHAT IS PATIENT CAPITAL AND HOW IS IT DIFFERENT TO OTHER OPTIONS? Patient capital is long-term equity investment into high growth and highly innovative companies. While it can exist in several forms, patient capital most commonly refers to investment in to venture capital funds by long-term investors such as pension plans and life insurance schemes. These venture capital funds in turn take a shareholding in young companies that have the potential to grow quickly or in the language of our industry, ‘scale-up’ quickly.

Investing in young, innovative companies is risky and not all companies will succeed.

To help manage this risk, venture capital funds will diversify their investments across several companies.

In return for giving a stake in its business, the owner of the high growth company gets capital to fund the company’s longterm growth and to develop products and services. Unlike bank loans or bonds, there is no capital or interest to be repaid, enabling the owner to concentrate on long-term value creation by growing the company.

The largest companies in the world, such as Google, Facebook and Amazon were all originally backed by venture capital. Closer to home, the UK is now regularly producing tech unicorns, private start-up companies valued at $1bn or more, whose growth has been accelerated by patient capital. In our own portfolio, fintech bank Revolut is now worth over $30bn.

Venture capital funds typically have a life of at least ten years, which is why it’s referred to as ‘patient capital’. During the first five years, the venture capital fund manager seeks out and invests in companies and in the second five-year period, it looks to ‘exit’. This ‘exit’ usually happens when the company is bought or is listed on the stock market.

DOES IT SUIT A PARTICULAR TYPE OF BUSINESS? Venture capital fund managers are highly selective, often seeking companies with products and services that are highly scalable, with the potential to transform industries. Technology businesses in areas such as software, life sciences or fintech have proven a good fit with venture capital.

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Each venture capital fund manager is different, and their investment strategies vary. However, what doesn’t change - for companies and venture capital investors alike - is that the company must have high-growth potential and that both sides must recognise that they are developing a long-term relationship that goes beyond the pure provision of capital.

ANY TRENDS YOU’RE SEEING IN THIS SPACE? We’re certainly now seeing more venture managers with the ability to make larger investments, and also the appetite to hold these investments for periods of more than five years.

It’s not just the supply of patient capital that’s grown and become more diverse, the quantity and quality of tech companies across many sectors has also increased.

This trend has been driven by several economic and societal factors, including a widespread shift towards increased digitalisation, which has accelerated as millions of people have moved during the pandemic to home working and hybrid office environments.

Another societal driver is the use of tech to address major global challenges such as disease and climate change.  23

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What is Asset-Based Lending?

For this section of Business Money, we will look at assetbased lending (ABL) and how companies can benefit from this funding lever.

Asset-based lending is a type of business loan that uses the borrower’s assets as collateral to secure the loan.

To acquire an asset-based loan, a business may use tangible fixed assets (assets that have a physical value) like machinery or property to secure it. Intangible assets (non-physical assets) like patents, trademarks and software can also be used. So, if a business fails to pay the loan back, their assets are used to cover the lender’s losses.

Asset-based loans are an excellent way for a business to increase their working capital, which is the difference between a company’s current assets and its current liabilities.

HOW BIG IS THE MARKET NOW? In the UK, the asset-based lending and invoice factoring market is worth more than £300bn. Invoice factoring is a specific type of asset-based lending that involves a business selling outstanding invoices to a third-party company. The value of the unpaid invoices is used as collateral for an asset-based loan.

WHY BUSINESSES ARE IDEAL FOR ASSET-BASED LENDING Stable small and mid-sized businesses with valuable physical assets are most likely to use asset-based borrowing, usually to cover short-term cash flow demands.

However, larger corporations occasionally acquire them for their own short-term needs.

There are very few restrictions on how the money raised by asset-based lending can be spent; if a company is having cash flow 24

problems, asset-based funding can provide them with funding to cover their expenses; if a company is looking to expand its operations by acquiring a new restaurant, the loan can also be used for this. Larger companies looking to fund a high-profile merger might also use an asset-based loan to help raise the required capital.

Asset-based loans can also be used in conjunction with other types of finance, whilst many providers of asset-based loans offer a fixed payback period. Therefore, making it easier for businesses to map out their business plan for after the loan has been paid back.

WHAT TRENDS ARE THERE CURRENTLY? Like much of the business world, assetbased lending also felt the wrath of the COVID-19 pandemic. The resulting lockdowns meant that the number of businesses using asset-based loans reduced in-line with business activity levels. For example, in December 2019,

there were 39,128 companies using assetbased loans at the end of the quarter, compared to 36,135 in December 2020.

Although we are yet to see activity return to pre-COVID-19 levels, it will be interesting to see if asset-based lending facilities will increase now that the majority of restrictions have been lifted.

CONCLUSION Asset-based loans can be an excellent way for businesses to raise working capital.

Whether this is to cover short-term cash flow problems or to fund a large merger, they can be hugely beneficial to small, medium and large businesses alike. Assetbased loans usually have lower interest rates than unsecured loans too because the lender can recoup most or all their losses if the borrower defaults. But like with any form of finance, it’s important to consider all the potential risks to determine whether it’s the most suitable option for financing your business needs.

August – September 2021

Making it happen, side by side Acquisitions / Management Buy-Outs / Re-structuring / Investing for growth

With an experienced team of decision makers nationwide, we can provide the funding to support a breadth of business situations – from £1m - £35m.

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Hawthorn Timber Ltd Wood Product Distributor

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Demand for ABL is returning following the pandemic To help businesses understand more about ABL, Business Money spoke to Mark Parsons, Head of Asset Based Lending at Shawbrook Bank.

FOR THOSE THAT DON’T KNOW, WHAT IS ASSET-BASED LENDING? Asset-based lending (ABL) is a term for a type of business funding that enables businesses to effectively free up the value of its assets to invest, grow, and acquire.

A business that has assets, and needs to raise cash for investment, growth, or even for working capital, can effectively use those assets as security to get the funding they need.

Traditionally, this type of lending is most popular in B2B businesses (those who generate invoices), that have a diverse asset base, such as debtors, inventory, property, or plant and machinery; although, B2C businesses with inventory also increasingly turn to ABL. A mix of revolving and amortising debt, including cash flow term debt, ensures cash is preserved to support the business.

“THERE IS AN ELEMENT OF STABILITY AND CERTAINTY THAT AN ABL FACILITY CAN PROVIDE, WITH LITE COVENANTS, WHICH IS ATTRACTIVE WHEN BUSINESSES ARE TRANSITIONING THROUGH THE TURBULENT PANDEMIC ECONOMY.”

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The majority of facilities will include an invoice finance facility as part of an ABL package, meaning that on an ongoing basis we can typically finance up to 90% of the invoice value immediately – releasing cash tied up in working capital.

ABL can, therefore, be used to provide both immediate cash and ongoing financial headroom to support strategic goals, and the facility has the ability to grow with the business.

HAS THE ABL MARKET SEEN GROWTH IN THE LAST YEAR OR SO? Over the last 18 months, we have seen a mixed picture. As the impact of the pandemic and associated lock-downs struck in the first half of 2020, many businesses saw trading volumes fall significantly. So, without generating invoices to finance, ABL activity decreased, although we worked closely with clients to ensure they had the headroom required to steer through this period of uncertainty.

Government loan schemes including CBILS and BBLS subsequently provided many businesses with the injection of liquidity that they needed – replacing the requirement for other types of lending, including ABL. However, with CBILS and BBLS now coming to an end, trading levels beginning to return to pre-pandemic levels across many sectors, and inflationary pressure widely evident, we are now seeing demand for ABL return at a time when results are showing Covid impact and forecasting is a challenge.

There is an element of stability and certainty that an ABL facility can provide, with lite covenants, which is attractive when businesses are transitioning through the turbulent pandemic economy.

WHAT WOULD YOU SAY IS A TYPICAL ABL CLIENT? Typically, we can provide businesses with facilities from £1m to £35m. Over the last year, we have provided ABL solutions to a diverse range of businesses, from renewable energy solution providers to more traditional manufacturers, logistics firms and even horticultural specialists.

We have also seen a wide breadth of funding needs from those businesses, including change of ownership, re-finance of existing facilities and simply funding for growth.

WHAT ARE THE KEY TRENDS YOU’RE SEEING IN THIS SPACE? This type of finance remains the most popular amongst some of the largest sectors in the country, including manufacturing, distribution, and wholesale.

We do see ABL providers continuing to evolve the proposition to accommodate a broader mix of assets as security, and we’re also seeing ABL being employed across an increasingly diverse range of needs and situations - providing not just working capital but also the funding required to restructure, complete a management buy-out or an acquisition.  August – September 2021

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Shawbrook Bank supports management buy-out of Hawthorn Timber Shawbrook Bank has delivered acquisition and working capital finance to Hull-headquartered Hawthorn Timber.

Managing Director Richard Thompson, Sales Director Richard Iversen and Production Director James Stone have completed the management buy-out (MBO), taking on the timber merchant business with backing from European private equity investor, Nimbus.

Richard Thompson, Managing Director, Hawthorn Timber, comments: “This transaction represents the start of an exciting new chapter for Hawthorn. Our success to date has been built on our relentless focus on serving our customers and the investment and partnership with Nimbus will allow us to grow whilst sticking to our core values.”

Founded in 1953 by Dennis and Sheila Stone, sons Trevor and Michael had then led Hawthorn Timber, passing responsibilities to the management team in 2005.

It is now an award-winning business – recently named the Small Timber Trader of the Year at the Timber Trade Journal awards – and employs 120 people, operating from five sites, with headquarters in Hull’s Wyke Street. The company deals predominantly in soft wood-based products and sheet materials, carrying more than 3,000 mouldings with bespoke potential, processing and distributing more than 60,000 sq m annually.

Business Money - A special publication by Business Leader Magazine

Chris Clegg, Head of Nimbus in the UK comments: “We are well aware of Shawbrook’s strong reputation in the sponsorbacked finance market and have successfully worked with them on another MBO in recent years.

“The Bank understood the potential of this MBO immediately, quickly providing acquisition term debt and working capital facilities, which offered us an outstanding ‘one-bank’ solution to support our investment.

“As a specialist, Shawbrook offered us bespoke structuring and could work to our tight timescales for completion. They met our needs as a sponsor and we very much look forward to working with them in the future.”

Daniel Martin, Senior Director, Shawbrook Bank, concludes: “Hawthorn is an impressive UK business whose customers rely on them to deliver. Nimbus’ and Hawthorn’s new management strategy is clear and there are multiple opportunities available to grow the business through increased volumes and production efficiencies. We are excited by this MBO and look forward to seeing how the business progresses in the coming months and years ahead.”

The business is in new ownership following the buy-out by its long-serving management team, and as it looks to the future, it now closes in on 70 years’ serving the city and beyond.  27

VC INVESTMENT

For every £1 of VC investment in the UK, all-female founder teams get less than 1p One of the key issues facing the funding space, is how can the sector ensure that people from more diverse backgrounds can not only access network that can support their business growth but also achieve better funding outcomes.

To discuss the subject in more detail, Business Money spoke to Kenroy QuellennecReid, Director of Strategic Delivery, at Funding London.

ARE YOU SEEING PROGRESS IN THE FUNDING SPACE WHEN IT COMES TO INCREASING FUNDING FOR PEOPLE FROM MORE DIVERSE BACKGROUNDS? Discussions about the disparities experienced by underrepresented entrepreneurs in accessing finance are not new. In the more recent debates about diversity, the focus had been tilted towards gender. A striking headline that emerged was that for every £1 of Venture Capital (VC) investment in the UK, all-female founder teams get less than 1p. Over the past 12 month or so, I’ve noticed that the debate has widen to fully include ethnicity.

Last year, a study by Extend Ventures revealed a similarly striking headline; allethnic teams received an average of 1.7% 28

of VC investments at seed, early and late stage, between 2009 and 2019.

by female, ethnic minority and disabled entrepreneurs.

A lot of awareness, recognition and goodwill have been building regarding diversity. Also, there have been some self-evaluations by fund managers. These have helped to create some momentum, but greater impetus is needed to reverse the figures above. The process is currently more an evolution rather than a big bang, as with the creation of the Future Fund.

In their 2020 equity tracker, the British Business Bank (BBB) reported that allfemale founder teams received 5% of all investments in 2020, compared to 16% where at least one founder was female and 84% for all-male founder teams.

While several research, initiatives and various actions have helped to bring this topic up the agenda, there is still a fair amount of work to be done to properly address the issues.

WORDS AND SENTIMENTS ARE GREAT BUT WHAT ACTUAL ACTION IS BEING TAKEN? Discrete work is being done to increase the supply of capital. Funds such as Impact X and Ada Ventures, have been established with specific remit to invest in underrepresented/overlooked founders.

And there are similarly targeted funds in the pipeline as others – such as Cornerstone Partners and Black Seed Ventures – are fundraising.

Also, funds like the Greater London Investment Fund (GLIF) that is managed

by Funding London, are working to make more of their existing capital available to underrepresented founders. GLIF recently announced that it will seek to commit at least £20m to businesses led/managed

WHAT IS YOUR ADVICE TO SOMEBODY THAT DOESN’T HAVE ACCESS TO FUNDING NETWORKS BUT WANTS TO GAIN INVESTMENT? It was reported that warm introductions are 13 times more likely to reach investment committees and eventually get funded.

So, funding networks can be crucial to successfully securing finance. However, this is particularly an issue for some groups of underrepresented founders who have limited access to formal networks.

To help overcome this I would suggest taking advantage of free activities such as office hours, pitching event, investment readiness and other support programmes.

Investors also sometimes get introduced to deals by their existing portfolio companies.

So, don’t be reticent about using this route, especially if the portfolio company is a customer who can vouch for your product/ service.

And finally, piggy-back on someone else’s network by using organisations, like Mountside Ventures, that specialise in helping start-ups to raise finance. These organisations sometime work on a success fee basis and the fee may be taken from the investment.  August – September 2021

UNDERSTANDING TAX AND THE DIRECTOR’S LOAN ACCOUNT It is entirely reasonable for business owners to assume that any money in their company’s bank account is theirs. However, there are significant tax consequences on how the funds are extracted. This is why the (often misunderstood) Director’s Loan Account (DLA), which is an account that records the transactions between the company and the director, is so important. Sean Hackemann, founder and director of Specialist Accounting Solutions, explains HMRC says a director’s loan is when you, or close family members, get money from your company that is not a salary, dividend, an expense repayment or money previously loaned to the company.

Quite often the DLA is overdrawn at the end of the financial year, meaning that the director ‘owes’ money back to the company. If the amount borrowed is not paid back within nine months and one day from the end of the financial year, then the company is liable for an additional tax charge under section 455 CTA 2010 at a rate of 32.5%. For instance, if the DLA was overdrawn by £8,000 and not repaid, then the company would have to pay a tax charge of £2,600 (32.5% x £8,000) under s455.

How does the company legally avoid paying this tax?

The simplest solution is to make a cash repayment back to the company. If the company has sufficient distributable profits and the director is also a shareholder, then the company can declare a dividend. No cash changes hands, as this dividend offsets the cash already taken.

Furthermore, dividends must be paid proportionally to shareholdings.

Sean Hackemann Founder & Director

If there aren’t enough distributable reserves, then you can either allocate unpaid salaries as a credit to the DLA or declare a bonus. There is more timing flexibility using a bonus, because it’s tax deductible for the company in the financial year it relates to, not when the payment is made.

Specialist Accounting Solutions is a niche firm of accountants specialising in advisory, virtual FD and financial outsourcing services. We work with ambitious entrepreneurs and management teams, who need specialist accountancy support to achieve their goals.

To discuss DLAs and your business, call us for a free no obligation consultation.

Watch our two-minute DLA explainer video

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