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Business Matters: How to fund expansion

As an owner manager with an expanding business, risk money will be high on your agenda. Yet it is not something debt providers have an appetite for. So, to whom should you turn for funding? Baker Tilly corporate finance director Simon Chapman explains.
Business Matters: How to fund expansion
CURRENT market conditions are favourable for investigating the venture capital route.

Venture capitalists have collectively raised record funds for investment in the last few years, but these funds have a limited life.

Given that a sizeable deal takes a similar amount of time and effort as a smaller one, venture capitalists have tended to focus on larger investments.

In recent years businesses seeking funding of less than £5m have found venture capital increasingly hard to come by.

Many investment firms increased their minimum deal size as they raised ever larger funds.

However, with fewer good quality investment opportunities and auctions pushing the prices of large companies to ever higher levels, certain venture capitalists have now broadened their investment criteria.

We are now seeing venture capitalists considering smaller, well-managed companies seeking funding from £1million to
£5million.

For investments of around £1million there are essentially two sources of funds, namely venture capital trusts and business angels.

They often fill the gap between money from 'friends and family' and venture capital. While venture capital trusts are similar in their approach and investment criteria to venture capitalists, they generally consider smaller investments, typically up to £1million.

Business angels fund great ideas and they can often make investment decisions faster than financial institutions.

However, they can also be more unpredictable as their investment criteria and procedures are generally not as formalised as those of financial institutions.

When considering a potential investor, non-financial factors are also crucial. Choose advisers based on quality, not cost. Raising capital happen rarely for you, whereas venture capitalists are professional investors, giving them substantial advantage. Level the playing field where possible.

When looking at your investor, consider their personality and experience:

· Ask yourself whether you can work with them?

· Do they understand your business?

· Can they add value?

· Also, remember to prepare yourself mentally as new shareholders often introduce additional policies and procedures.

Finally, when looking for investment, continue running your business!

It may not be rocket science but a slip in performance could lead to loss of investor interest.

Simon Chapman can be contacted on 0121 214 3100 or e-mail
simon.chapman@bakertilly.co.uk
1 January 2007

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