To grow at the right pace, you might need outside funding

Planning investment in your business? Ensure your long-term strategic plan highlights when and where you’ll need that funding, and how you’ll get it. Get the inside track from Helen Roxburgh, Partner at KPMG.

KPMG Enterprise’s Moments That Make You report can guide you through critical growth decisions, including planning investment in your business.

Helen Roxburgh, Partner, KPMG

We regularly encounter business leaders who have grown their business to make profitable returns, but find themselves hitting a wall in continuing to deliver growth to scale.

And for many management teams there is no option to stop, wait and build up a war chest, because any serious delay will see competitors come in and fill the gap. That means one thing: outside funding.

The fundamentals of finding funding

Whether you decide to raise debt or consider Private or Public Equity, the fundamental approach is no different – everything comes down to your corporate strategy and your ability to articulate it properly.

"Don’t leave a commercial financing discussion solely in the hands of the Chief Financial Officer: the lowest price is not always the best price."

Helen Roxburgh, Partner, KPMG

You need to be clear on your long-term plan (typically across five years) and how you're going to implement it. You also need to be able to explain how you’ll spot the inevitable challenges to your business or industry that come up and, of course, how you’ll respond to them.

Once that’s in place, it’s vital for the senior management team to reach an agreement on what financing requirements are needed to make it happen – and, most importantly, which markets and lenders suit your objectives and growth plans.

One thing that can stop this in its tracks is vagueness: investors and lenders need to be persuaded that you’re capable of both delivering growth plans and servicing the borrowing, and that will only happen if you can demonstrate granular knowledge of your business, its nuances and forecasts. They’ll also want a precise and clear articulation of why you need the money – whether it’s for people, products, new premises, entering new markets or overseas expansion – and how that supports the returns you’re projecting.

Types of funding available

There are many different funding options for businesses. For early-stage businesses, for example, options include independent private investors, venture capitalists and other types of ‘incubators’ who provide funding and advice to startups.

If you’re a larger business with more specialised leadership roles, don’t leave a commercial financing discussion solely in the hands of the Chief Financial Officer or Finance Director, as this may result in a view led by an appetite for risk and debt rather than the wider commercial perspective. Involve the Head of Operations and Technology Chief because they’ll be looking at other factors and considering the need to retain greater flexibility in their access to capital.

The funding landscape breaks down into three broad territories:

  • The debt market: If your investment plans are modest, debt can often be leveraged against existing assets or cash flows of the business. It’s also cheaper than equity. However, debt can hold growth plans back if the debt facility isn’t sized to grow with your business, so you have to make sure that your finance plans and corporate strategy are in perfect alignment.
  • Private Equity: Private Equity can be used in conjunction with debt to raise more capital. This type of funding may also be able to offer an extra injection of capital to fuel growth, as the structure is sufficiently flexible to provide an additional boost. However Private Equity investors will install a board representative and take a share in the business. This route isn’t for everyone, but it can be a real benefit if market or specialist knowledge is needed.
  • Public Equity: Listing the company can give you a strong growth platform, but it comes with a much heavier set of responsibilities around corporate governance, disclosure and transparency, so the overall balance of benefits will depend on the size of the business and the team’s capability to deal with more stringent processes.

Callsign case study

Zia Hayat, CEO and Co-Founder of Callsign, shares his personal story of founding a company and completing a $35m Series A fundraising round.

Read more

''Balance the risk of investment, to make sure that it aligns with your corporate strategy.''

Helen Roxburgh, Partner, KPMG

De-risking your investment

It’s also important to balance the risk of investment, and to make sure that it aligns with your corporate strategy. One of the key considerations may be flexibility of terms. Whether its debt or an equity investment, restrictive terms and provisions from funders could present serious obstacles down the line. An example of this would be limits on capital expenditure.

We often find that pricing is a flashpoint here: don’t be inclined toward the cheapest pricing, if that option comes with a series of restrictions that could prove problematic in the future, it’s worth thinking twice.

Maintain investor relationships

Finally, it’s important to use your financing plan to maintain a long-term relationship with future investors and lenders. This shouldn’t be particularly onerous but, if you know you will need to be looking at refinancing a tranche of debt or raising some Private Equity funding in the next 18 months, say, it pays to target a few banks or investors and meet for a coffee once a quarter. Get them interested in – and knowledgeable about – your growth story before you need to go and pitch.

Key takeaways

  • Before you proceed, be crystal clear on your long-term plan – and how you're going to implement it
  • In doing so, make sure you’re also scoping for future challenges to your business or sector, and how you’ll respond to them
  • Give potential investors the clarity they need, with a detailed picture of how and where the money would be spent, and how that supports the returns you’re projecting
  • Remember, the way you raise investment isn’t just a financial matter for the CFO: it’s a strategic question for senior management
  • Make sure you’re confident in your financial modelling to understand the suitability of the funding and what it can be used to achieve.

For more on planning investment, and many other aspects of growing a private business, download our Moments That Make You guide.

Download the guide for CEO stories and expert advice to help you achieve your business growth ambition.

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