Getting the right funding fit

There is near universal agreement that business finance is in plentiful supply at the moment. The banks have loosened the purse strings somewhat, there are numerous Government-backed schemes to assist businesses seeking to grow and improve capability and there is no shortage of private equity and venture funds looking for investment opportunities.

The question tends to be one of matching the funding to the business need. A short-term loan is clearly not the right solution for a business wanting to buy a premises or acquire another business, while raising funds by selling equity would hardly be an appropriate means for a retailer to finance the purchase of new stock.

The good news is there is a wide range of financing options spanning these two extremes which business owners can choose from. The most common of these at the start-up and early-growth stages of a business are friends and family, with bank lending such as personal loans and overdrafts also coming into play. After that, there are State grants and other supports, seed and venture funds, non-bank lending, and peer-to-peer to name but a few.

Donnchadh Cullinan, growth capital and banking relations manager with Enterprise Ireland, stresses the importance of getting the right fit. "We see a lot of clients with many different funding needs and it's a question of finding the appropriate means of finance for them," he explains. "For example, there is a lot of finance available out there through venture funds and so on at the moment but sometimes a company just doesn't fit the model. You have to look at what type return an investor is looking for. A venture fund is typically looking for a multiple of 10 in terms of return. If your business is growing at 2 per cent a year it is never going to get funding from that source."

However, that type of business might be perfectly suited to bank or another type of loan finance.

In order to encourage seed and venture capital funds to invest in early-stage companies which might be seen as higher risk or having an insufficient track record to justify hazarding capital, Enterprise Ireland has made finance available to a number of the funds. A total of €685 million is under management in these Enterprise Ireland-supported funds.

These include the AIB Seed Capital Fund with €53 million under management, the Atlantic Bridge Venture Fund (€67 million), the Bank of Ireland Early-Stage Equity Fund (€32 million), Delta Partners (€105 million), and Seroba Kernel Lifesciences with €75 million.

Business angels

Cullinan believes also believes that many Irish companies may be best suited to business angel investment. Business angels are private individuals who invest relatively small amounts of money in new businesses in return for a share in the company and also contribute their expertise in business management and their personal network of contacts. They typically invest between €20,000 and €250,000.

Enterprise Ireland is directly involved in supporting Business Angel activity through the Halo Business Angel Network, a joint initiative between it and InterTradeIreland, which is aimed at developing angel-investor syndicates across the island of Ireland. The agency has also joined forces with the European Investment Fund to launch the €20 million European Angels Fund Ireland, which will co-invest with approved Irish business angels in Irish-based internationally trading SMEs with investments ranging from €250,000 to €4 million over 10 years.

“There are so many good Irish companies with so many good products,” says Cullinan. “There are some amazing companies out there and they need to get better at selling themselves and their products. Business angels invest in stuff that they know about. They have money to invest and time to devote to other companies. Very-early-stage companies can find it challenging to get funding but angels are domain specialists and can bring expertise and capital to help them grow.”

KPMG partner David O'Kelly points to the emergence of so-called family offices as another source of funding for growth companies. These are effectively private equity funds owned and run by wealthy families. "You find them active throughout Europe and we've done an amount of investments with family offices here in Ireland over the past number of years," he says. "The great advantage is that the business gets the money but also gets people on board who know about family businesses and understand how they work. That's very important."

Another source of funding is the Employment and Investment Incentive Scheme (EIIS), which replaced the old Business Expansion Scheme. This scheme provides income tax relief to qualifying investors for investments in certain qualifying small- and medium-sized companies. The scheme is attractive to investors as it offers one of the few remaining income-tax reliefs and is one of the last sources of total income-tax relief which includes, for example, rental income. It is attractive to SMEs as it is a way of raising risk capital without having to give away equity in return.

“There are three or four EIIS funds active in the market at the moment,” says O’Kelly. “They don’t have unlimited funds and they tend to be active in areas like nursing-home developments but they are an important part of the mix.”

Not all SMEs have a five-year growth plan or anything like it, of course. They might have an immediate need for new equipment to add to production capacity or to add a new vehicle to a fleet to support sales growth. Fortunately, there is a highly competitive lending market for that business as well, with firms like Convertibill offering a range of trade finance products to meet just about every need.

The company offers order finance, supplier finance, invoice finance, sales finance, distribution finance, and lease finance with no requirement for personal guarantees or liens and a speedy approval process. “We can provide finance where the banks won’t and because we are smaller, we can approve faster,” says marketing manager Damian Kenny. “We offer end-to-end trade finance options from order and supplier to invoice finance. We help companies unlock the value tied up in their business and allow them to use it to fund growth. We set businesses free to trade without the shackles imposed by banks and other lenders.”