How Do We Solve the Equity Dilemma?
Today’s CEOs face a number of headaches. How to find the right people, how to manage their costs, and, importantly, how to deliver sustainable growth. Torn between debt, which they cannot raise without tangible assets and often dauting personal guarantees, and diluting their equity, which they are reluctant to do simply to raise cash, many executives face an equity dilemma. Below Dominic Buch, Co-Founder and Managing Partner at Caple, discusses his thoughts on this issue, and offers some solutions.
Just last month, a study by the British Business Bank revealed that while one in three businesses want to grow, they are unsure how.
Drawing on interviews with 500 business owners, the bank’s study shows awareness or knowledge of alternative finance is a limiting factor.
Graeme Fisher, the managing director of the bank, said many business executives find it hard to identify or are unaware of the right type of finance to help them grow.
The impact on business is stark. The study shows that 27% of SMEs abandoned their growth plans if they did not get the finance they needed.
The struggle to secure finance: the equity dilemma
Ten years after the financial crash, many businesses still struggle to access suitable capital, especially unsecured debt finance.
Banks will usually fund an amount that reflects the assets in a business. But if a company has no further assets to offer as collateral, or if a director doesn’t want to commit to personal guarantees, banks can’t help.
In a service-based economy such as the UK, the lack of unsecured lending, based on an understanding of the future cash flows of the business creates an obstacle to growth, and even succession planning.
As a result, some companies may be pushed to issue equity instead of raising debt.
Executives can often face an equity dilemma.
Either they scale back their growth or succession plans, or dilute their ownership to fund them.
Alternative finance is helping
The alternative finance market is filling the gap.
As banks retreat from this market, Caple’s strategic alliance with BNP Paribas Asset Management enables institutional investors to invest directly in unsecured SME loans.
What’s more, BNP Paribas Asset Management has the ambition to provide €1 billion in funding across Europe and €400 million in the UK per year through its SME Alternative Financing platform.
Now, through new businesses like Caple, SMEs are able to access long term flexible and unsecured debt finance of between £500,000 and £5 million.
Proving the appetite for this type of debt finance among SMEs, at Caple we have just completed our second deal. We facilitated a £4.25 million unsecured loan to Ralph Coleman International, a retail services business.
This loan follows our first UK deal of £1.5 million with Baltimore Consulting, a specialist recruitment services company based in the West of England, in the summer.
These deals give these two businesses the funding they need to drive their next phase of growth – without having to dilute equity and lose control of their businesses.
The importance of business advisers
The advice and expertise of an accountant or financial advisor is central to a successful SME funding outcome. They assist in navigating a crowded market, structuring the funding solution and preparing financial forecasts and business plans.
These advisers are an integral part of the process.
Supported by technology they can assess the eligibility of their clients, and tooling assists in the preparation of the business plan and forecasts required as part of the funding process.
Origination by local partner networks of business advisory firms is combined with an initial credit assessment by our credit analysis teams. This creates a seamless, end-to-end credit process.
When SME’s are such an important part of our economy, we need to help them secure the finance they need to grow. And we need to do this without pushing executives towards diluting equity and losing control.
Now there is another way to solve equity dilemma.
