Looking to raise money in the recession?

In such a competitive market it’s vital to be well prepared

Despite the credit crunch, there is still some money available for businesses looking for additional finance. But in such a competitive market it’s vital to be well prepared.

Is it still possible in the current climate to raise new investment for your company? Are venture capitalists and angel investors closed for business? Where can you get additional finance?

According to Aegis Corporate Strategy it is still possible to raise finance for both established businesses and early-stage companies. However, there is a lot less cash around than there was 12 months ago so businesses and their advisors need to have a high quality business plan and put forward a compelling case.

A number of the larger venture capital companies that invest between £1m and £10m in early-stage companies still have substantial resources available. However, investors are very choosy and often focused on specific sectors so it’s vital you’re well prepared before you approach them.

The market for equity of less than £1m has been very badly affected. Traditionally this has been provided by venture capital trusts (VCTs) and business angels.

There is a dramatic reduction in the finance available from both of these groups. Business angels will normally look for EIS (tax) relief on their investment. It is worth remembering that there is a much higher appetite for EIS opportunities in March and October as angels look to maximise their tax relief.

Financing increased working capital requirements caused by reduced sales, however, is extremely difficult. In some cases where the banks have refused to provide additional finance, venture capitalists will bridge the gap but this is very expensive for shareholders.

While the new government measures will hopefully increase lending, it is going to be a number of years before we will be able to negotiate loans at the same level and conditions that were achieved in 2007 and early 2008. In the interim, management should explore options such as invoice discounting and a mezzanine loan before looking for equity.

The number of banks providing new loans for buyouts and acquisitions has fallen dramatically. Deals in excess of £50m are particularly difficult if additional banking is required. There is still an appetite for smaller deals but fees and margins charged are often at least 100 per cent higher than 12 months ago.

If you are contemplating an acquisition or buyout talk to a number of banks at an early stage to assess the level of borrowing you can get. Then look at alternative financing to bridge the gap.

Will the vendor agree to a deferred payment? Will they retain an equity stake that can be bought out at an agreed price at a later date? Will they reinvest alongside a venture capitalist? Will they provide a mezzanine loan to bridge the gap? Most importantly, will they reduce the price? Remember there are fewer options available to vendors these days and this should help you to agree a better or more flexible deal.