Supporting a new business concept - with £500,000 venture debtPublished on 19th November 2019 2019-11-19T12:00:00+00:00
If you have entrepreneurial clients who need help to put radical new business ideas to work, coming to Rangewell might be the simplest way for you to help them. We work with businesses of all kinds, and we not only share an entrepreneurial approach, but we also know the lenders most likely to support it.
We recently provided a £500,000 venture debt solution for a new type of online business.
We were approached by an advisor who was working with an online business that had developed a website with a radical new solution for online vehicle hire. The owner had proved his concept with a geographically-restricted service, and with a small but positive income stream from his online start-up, he was ready to scale up his operation.
His first step would be to take his business nationwide. He would need to fund marketing to build awareness of his service - and he required an investment of around £500,000 to do it. His advisor cautioned him that as a new business he might face difficulties raising that scale of cash. Any new business is seen as a risk by lenders, who prefer to see a record of trading success backed by a few years of accounts before lending.
What's more, as a completely new and unproven business model, there were no precedents which might persuade lenders that the business was sound. The prospects for lending looked slim.
However, at Rangewell we were determined to help and looked at some of the less common means of raising funding. Even though it looked as though most of the familiar types of commercial lending would be out of the question, we knew that there could still be answers from specialist lenders who shared the client's entrepreneurial approach.
One of these was venture debt.
About venture debt
Venture debt, or venture lending, is a type of debt financing provided to new and growing companies and designed to provide answers for funding growth.
Venture debt can provide a source of additional capital, and particularly growth capital, for entrepreneurial companies. As a complement to equity financing, venture debt provides growth capital to extend the cash availability of a start-up company and helps them to reach the next milestone.
It can complement venture capital investment and so can be most suitable for fast-growing companies and their investors.
Unlike traditional bank lending, venture debt is available to start-ups and growth companies that have not yet achieved positive cash flows and which have no significant assets to use as collateral. It can, therefore, be particularly appropriate for internet-based businesses, where a concept is the main business asset - as long as that asset can attract the interest and confidence of investment managers.
Venture debt generally provides a three-year term loan (or series of loans), secured on the future growth of the company. Venture debt providers support their loans with warrants, or rights to purchase equity, to compensate for the higher risk of lending to the start-up and related sectors. It is a form of risk capital that can be less costly than solutions such as Mezzanine Funding, while still avoiding the risk that the owners will lose control of their business.
Access to capital is the paramount concern of emerging growth companies. First and foremost, a start-up must secure the proper amount of capital; too little and it may fail to thrive, too much and it may become bloated and unable to grow efficiently. Cost is critical as well—many an entrepreneur and investor have built successful companies only to find that the fruits of their labour have been diluted significantly along the way.
How we helped
At Rangewell, our ability to access all types of business helped us recognise the possibilities of venture debt.
With our contacts with private equity firms, we are uniquely positioned to access this type of funding when the need arises, and we set about contacting appropriate lenders.
Unlike other types of funding, there may be no set requirements to be met when dealing with venture debt arrangements, but we worked with the client and the advisor to prepare a proposal that we could circulate to potential lenders.
We also identified a way of refinancing the funds advanced through R&D tax credits.
Research and Development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation and provide a valuable source of cash for technology-based businesses to invest in accelerating their research and development and in funding growth. With far fewer than 500 staff and less than €100 million turnover, the client’s business would be suitable for this tax concession - which we believed could support repayment of the venture debt over the next few years if the business took off as its owners - and industry analysts we consulted - believed that it could.
At Rangewell we can work with you as an advisor to help you find the solutions your clients need. Whether their business is innovative or conventional, we can work to find the funding solutions they need. Simply call us at Rangewell on 020 3637 4150 - or email [email protected]
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