Funding finance: where money talks

Raising finance for growth is a subject that brings out a fairly predictable
set of moans from finance directors and their advisers.

The banks give you the run around, the government-backed schemes require too
much bureaucracy and management time and the venture capitalists always ask far
too much, too soon and give too little. Actually at a certain point, one begins
to wonder how any growth is financed at all.

So it was nice to bump into Craig Brown, finance director of Kryson
Resources, an
AIM-listed company that is prospecting for gold in centralAsia. ‘We are in a
bullmarket for mining and raw materials and so we haven’t had any problems in
raising money.’

But it isn’t only mining companies that have benefited from easier finance.As
the economy evolves and expands into areas such as the environment and the
wilder areas of technology, so specialist funds have been created to cater for
these sectors.

‘Not only are there new funds but the banks generally have become more
innovative and creative in their risk assessment,’ explains Darren Jordan, a
partner with Blick Rothenberg.

‘Many are now treating commercial leases as assets. They are generally more
sophisticated in their risk assessment, but they are well aware of the state of
the economy and in recent weeks we have seen more caution creeping in. In terms

of real innovation, I know of one company that raised money by borrowing from

its employees.’

Jordan, likemany, is quite scathing of the various government schemes that he
feels, despite being much trumpeted, are simply not worth the hassle. ‘There is
always less than you think available and they demand so much in management
time.’

Many companies realise that bank debt, however flexible, does not have the
advantages of private equity or going toAIM when it comes to financing growth.
Many are now looking to strategic partnering where large players take minority
stakes in up and coming companies in their sectors. But for some, the price of
having someone else on the board trying to call the shots can be too high.

John May is an accountant who has helped many companies raise finance for
growth. His advice is simple. ‘It’s often just a question of knocking on doors.

Eventually you will find a lender who, because of the state of their book,
and because they are more imaginative or they understand what you are talking
about,
will lend.

‘Each lender is in a slightly different position.What is mezzanine or equity
finance to some is a straight loan to others.

Occasionally you do get originality. I had a bank recently that split a £5m
offer into
straight loan and revolving credit. It is important that companies work out what
they want the money for and over what term.’

Unlike others, May praises the government guarantee loan schemes, although he
does admit that, under present rules, there is pressure for banks to push
companies down the factoring route.

Over the past few years, there has been something of a rush to finance growth
by
listing onAIM.Andy Wallfold is transactions manager of Marwyn Capital, which in
the last year has put six management teams into shells for the purpose of
acquiring and growing other companies.

‘Many of thesemanagement teams have found that the private equity route is

a bit restricting,’ he says. ‘Venture capitalists typically make one investment
and want to make that pay quickly, while those pension funds and the like who
invest in AIM companies are in it for a longer term.’

But many smaller companies will be looking for seed finance or even business
angel backing before they look to AIM as a funding mechanism. One company that
does both is the Catalyst Investment Group, which last year did 30 deals in the
£50,000 to £1m bracket. Four times a year it also hosts an Entrepreneurs Lunch
Club where would-be backers are entertained by three companies.This route raises
about £2.5m a year.

Renwick Haddow, a director of the Catalyst Group, claims to be offered around

20 deals a week, ‘and themain problem is always the same’, he says. ‘Companies
feel if they are worth £6m, then they haven’t done a day’s business. I am really
looking for a simple business that investors can understand and a strong
management team.’

But while those providing finance for growth can point to a whole raft of
venture
capital, venture capital trusts, private equity and government guaranteed loans,
others are not sure there is any new dawn in this area.

Mike Smart is the group managing director of the Gowi Group, which is
involved in online recruitment and content management. In six years, the company
has grown to a £6m turnover and 100 staff.

‘I am still disappointed with the financial community,’ he complains. ‘The
banks
don’t want to know about these government guarantees, private equity is not
interested in the smaller player and the trusts don’t really like technology
companies like ours. We have raised money from friends, family and fools.’

GOVERNMENT GRANTS

Ernst &Young director Nigel Wilcock runs through some of the major
schemes up for grabs

R&D – Support for companies is now widely available through
the R&D tax credit,which can be considered state aid by the European Union.
There is a national DTI grant for R&D and a European grant regime called
Framework 6, available to companies involved with pan European collaborative
projects.

EMPLOYMENT & TRAINING – Funds are aimed at training
providers and organised by the Learning and Skills Council. Grants are available
through the regional development agencies.

ENVIRONMENTAL GRANTS – The EU makes provisions for national
governments to provide funding under environment schemes.

CAPITAL INVESTMENT in assisted area – Companies seeking
funding must explain why the grant will allow the project to progress in the UK.
The government will not pay more than a set percentage of the eligible
expenditure.

REAL ESTATE DEVELOPMENT – Where there is gap between the end
value of a development project and its cost, grant aid can meet the difference,
albeit within set limits. These grants are used for regionally important
development projects rather than small building schemes.

HughThompson is a freelance journalist