Offbeat drinks company Brewdog recently invited the public to invest in the business through its ‘Equity for Punks’ scheme. Is it time your company reviewed the alternative funding landscape?
As with nearly everything else it’s done, Brewdog’s recent fundraising initiative has been somewhat unusual. While inviting the public to invest in the company through its ‘Equity for Punks’ scheme may be working for the creators of a beer called Tactical Nuclear Penguin, this kind of alternative funding isn’t suitable for everyone.
However, given the difficulty of getting hold of funding through traditional, bank-financed routes, especially at the smaller end of the market, many companies are now looking at alternative funding avenues as a way to get their hands on the cash they need to thrive.
There is no one-size-fits-all approach. Thankfully, there are a number of alternative funding schemes out there, but which one will be most suitable for your business depends on your business model and where you fit in the supply chain.
Asset-based lending (ABL)
Outside of the standard, cash flow-based and securitised bank loans, there are a number of ways to secure funding without giving up equity in your business.
One of the common approaches can be invoice discounting; this is a viable route for firms that don’t have substantial physical assets available for providing security to a bank. This financial product works by taking into account the quality of a company’s debtor book, using it like assets as a form of loan security.
For example, a manufacturer or distributor may have a number of customers whose orders it has fulfilled, but from which it hasn’t yet taken payment. The invoice discounter can lend a percentage of the total owed by the debtors, using the amount owed as security against the loan.
This will only work where the debtor list can be shown to be reliable, and has an obligation to pay the debt. As a result, the firm needs a good quality debtor book for this to be viable.
Another option is mezzanine financing, which bridges the gap between debt and equity-based financial products. It is usually used to raise capital on a short-term basis, and provides a great alternative funding source. The lender has the option of converting the loan into equity if it isn’t repaid and, because the loan doesn’t have the traditional characteristics of debt loan, the cost of servicing the loan is generally higher than the interest on a standard loan.
As there is an element of equity linked with this finance product, it will work better for profitable businesses with a strong position in the marketplace, no matter what part of the supply chain they are in.
There are many in the industry who will disregard equity financing as simply being too difficult to secure. While it is true that equity investment is harder to get hold of than before the recession, there are still lots of private equity firms out there that want to invest. However, there are also lots of businesses out there looking for private equity investment; the challenge is getting your company noticed.
Bigger, more established companies will stand a better chance of securing this investment as they can prove they are making a profit, and that the investment will help to scale this up even further. Smaller firms, especially start-ups, will find it more difficult because they offer a greater degree of risk.
In the food and beverage industry, this is exacerbated because of the sheer number of products on the shelves, and the corresponding lack of shelf space. The room isn’t there for many new brands to proliferate or grow. As a result, any firm looking for equity funding has to present a strong business case, outlining exactly where it sees opportunities in the marketplace, and how it would go after these. This is especially important for smaller, less established firms trying to secure early stage funding.
Other types of alternative funding
Alternative funding doesn’t just start and stop with equity and debt. Another way is through government grants. Often these grants will be linked to schemes to improve the economic prosperity of a particular area. As a result, these kinds of grants are more suited to firms with a large headcount, such as manufacturers and distributors.
An example of a government-backed scheme in the UK is the Business Growth Fund, set up through the Government and backed by five of the country’s main banking groups. The aim of this fund is to inject capital into the UK’s small- and medium-sized enterprises. While it is an equity-based investment, it is geared to providing funding for smaller businesses that might not have any success with traditional investment houses. It also stresses that it works with the businesses it invests in to ensure the money is being used in the best way possible for that firm’s growth prospects.
The Regional Growth Fund (RGF) is another option, offering grants of £1 million and above to firms located in England. Round five of the RGF has just launched and is focused on providing capital funding support in return for job creation.
As with other equity-based products, you have to present the right business story to show why you need the investment, and how you would use it.
The right funding for you
Whatever stage your business is at, and wherever it is in the supply chain of your industry, there should be a suitable source of funding out there. The key is looking for the most suitable investment product, and then ensuring your business proposition meets its investment criteria.
Whether it is crowdfunding, equity, debt or grants, that money isn’t going to come to you. You have to understand what the investors are looking for, and ensure you are presenting the most attractive proposition possible.
Image: reproduced courtesy of Brewdog, © 2013