Venture capital trusts: How to find alternative finance solutions
If you’re a small business or start-up looking for finance, who can you turn to if your bank turns you down? Don’t worry, you have lots of ‘alternative finance’ options available to you. Venture Capital Trusts (VCT) are one such example.
What are VCTs?
Venture Capital Trusts are investment companies that are listed on the London Stock Exchange (LSE) and have been set up to invest in small UK businesses that meet certain criteria. To encourage support for these businesses, the UK government offers generous tax benefits for VCT investing. This also reflects the higher-risk nature of the companies they invest in.
In a report from the Association of Investment Companies (AIC) called Transforming Small Business, the AIC found that 57% of smaller companies received a total investment of between £2m and £10m from VCTs. Meanwhile, the average level of investment received by small businesses from VCTs was £3.2m.
Since November 2015, VCTs have made more than 100 investments, with a value of £213m.
One such VCT is the Octopus Titan VCT. Simon Rogerson, CEO and co-founder of Octopus Group, says: “We invest in and support early stage businesses across the UK, from start-ups to those listed on the AIM market. Over the years, we have invested in more than 500 SMEs including household names such as LoveFilm, Graze.com, Fever Tree and Zoopla Property Group.
“We invested in some of those businesses at an extremely early stage and have provided subsequent follow on investments that have helped them grow and develop, partnering them from one defining moment to the next.”
In May 2017, Livingbridge VCT invested in online fashion retailer In The Style to help the business grow its management team and warehouse operations, and enter markets in America and Australia.
Meanwhile, in December 2016, Calculus VCT invested in Weedingtech, which designs and manufactures herbicide-free weed control systems. The aim of its investment was to boost Weedingtech’s sales, manufacturing and product development capabilities.
Weedingtech’s core product kills weeds and moss using close-to-boiling water encapsulated in environmentally friendly organic foam. It responds to environmental and health concerns raised by certain chemicals.
Which parts of the UK are VCTs investing in?
The AIC’s review found that 46% of VCT investment has been made to businesses located outside London and the south east.
VCTs invest for the long term and providing follow-on finance is a key aspect of this approach. Many investee companies have been able to rely on continued financial support to move them to the next stage of their commercial development.
The AIC’s review found that 60% of companies received more than one investment, whilst almost half (44%) received more than two.
Ian Sayers, chief executive of the Association of Investment Companies, says: “VCTs have provided vital scale-up capital for the UK’s smaller companies, the engine of the UK economy.
“Entrepreneurs also have benefited from the support of expert fund managers seeking out the commercial potential of new technology and entrepreneurs with the skills and ambition to make a difference.
“VCT investment boosts smaller companies across the UK. It targets younger companies with a majority of businesses receiving funds being less than a year old.
“The AIC’s review demonstrates VCTs are an essential way in which small businesses secure access to long-term finance.”
Why are so many start-ups and small businesses turned down for finance?
Stuart Law, CEO of peer-to-peer lender Assetz Capital, says: “Sometimes an individual bank can’t lend to every business that applies for a loan due to the restrictions of complex banking regulations.
“Sometimes good, creditworthy businesses don’t meet specific requirements set out by a bank, but might be able to borrow from say a peer-to-peer lender. Peer-to-peer lenders operate differently to banks in the way they are funded, which means we can be more flexible.”
Assetz Capital works closely in conjunction with Royal Bank of Scotland (RBS). It has created an innovative partnership to improve access to credit for SMEs. So, if RBS is unable to help an SME get the loan it needs, it will pass on relevant details to Assetz Capital who will work with the business to develop an appropriate loan package to suit both the peer-to-peer investors and the SME borrower.
The SMEs may be either existing business finance customers of RBS or new businesses seeking funding.
What other alternative finance is available to small businesses?
Graham L Morgan, SME growth consultant with national network Business Doctors, says there are a number of alternative finance options available to you if you are a small business or start-up:
Asset finance/hire purchase
This refers to the opportunity to finance the use of a vehicle, item of equipment, telephone system, computers/devices and certain software over a three or four-year period commensurate with the expected active lifetime of the item purchased.
Once a business has been successfully credit approved, an agreement is put in place. Typically, it involves three months’ worth of instalments up front, with monthly payments over an agreed payment term. The benefit is the minimal use of cash resources and structured payment against expected profits.
For those businesses that provide extended payment terms, invoices can be sold to release working capital cash. There is a cost and this often works on similar basis to an overdraft. The benefit is the facility will grow with increasing sales and hence offers maximum flexibility. Service can be extended where the provider collects payments for added cost.
Start Up Loan Company
This is a UK government-supported scheme to help businesses under two years of age. Each director/partner can borrow up to £25,000 in their own name to support the business. Loans have flexible terms and a fixed interest rate. They are repayable over five years.
In my area, Finance Wales offers loans and equity funding. Similar organisations operate across the UK and primarily fund the expansion of businesses that have a track record of a few years. Terms are flexible in as much as the offer could be a loan or equity, or a mix of both.
There are also organisations such as UK Steel Enterprise that are specifically active in the former coal and steel heartlands and their focus is often job creation and protection rather than return of monies.
Innovate UK offers a round of funding for IT-based projects primarily. Tranches of funds are announced on a regular basis linked to sectors or key areas within sectors.
They take the form of an auction where businesses can bid for funding and their application is judged against others to allocate monies available. It can be a bit of a lottery as funding is not guaranteed.
My recommendation would be to use a specialist advisory firm that has experience of submitting and winning allocations.
Family loans are a good way of getting family commitment for a new business venture or expansion. They have been very much a standard approach within certain communities and can be a way to borrow money at a low interest rate, with terms to suit that individual business or start-up.
What are ABFs and how can they help?
The UK government has also thrown a lifeline to the finances of SMEs via its Bank Referral Scheme (BRS). It refers business owners in need of alternative finance options to four designated platforms – including Alternative Business Funding (ABF).
ABF will be referred to small businesses struggling to access finance from nine of the UK’s biggest banks (from 1 November 2017) alongside three other designated finance platforms.
ABF has grown strongly over the past year, helping to fund businesses across the UK.
Businesses funded through the ABF platform include Cardiff-based Carbon Law Partners, which aims to be the legal adviser of choice for fast-growing enterprising businesses in the UK, and Ice Blue Sky, a London-based content marketing agency.
Award-winning chocolate shop Cocoa Amore was opened by Peter Gardner in 2013. He accessed Quick Capital’s cash flow finance via ABF when producing a large order of Easter eggs.
He says: “My business is seasonal, with 40% of the year’s turnover generated in December alone. For the past few years, I have been producing solid chocolate Easter eggs for another company. This year, the order doubled to 500 eggs.
“The eggs are expensive to produce, so I needed cash flow finance to help while creating the products. I’ve taken out business loans in the past but I didn’t want to be tied down by more monthly payments.
“I enquired through the Alternative Business Funding website to find out what kind of funding options were available.
“There are lots of alternative options to choose from out there but I found cash flow finance from Quick Capital was the perfect fit for me.”
Carbon Law Partners
Law firm Carbon Law Partners handles a variety of commercial deals and disputes. It needed to fund rapid growth and a longer-term strategy for its online platform. The route to financing both phases of the company’s expansion was through the ABF platform.
The ABF portal’s advanced funder finder engine returned a match with Boost Capital, which offers quick and flexible financing solutions to clients. Carbon secured a loan from Boost Capital to finance a new application for its back-office system.
The company’s founders, Michael Burne and Owain Saunders-Jones, were also focused on a further phase of the company’s “growth window”. They planned to invest their own money back into the business and, most importantly, keep control of their law firm.
They were matched with Pension-Led Funding (PLF). This gave them the chance to use their combined pension pots to provide finance for their plan for more growth via senior appointments in marketing and business development.
Michael says: “ABF is philosophically aligned to us because it is a platform. It’s a platform, and what it does is the thing we love most: it makes connections. It’s a dating agency for funders and those who need funding.”
So if you’re having no luck with your high-street bank, try an alternative finance method and see which ones are a good fit for your business.
Recommended Next Read
How to win small business investment - International Women's Day episode
Guide to alternative funding
Discover 10 sources of funding for your business and how to apply in our essential guide for startups and small businesses.
Subscribe to the Sage Advice newsletter
Join more than 500,000 UK readers and get the best business admin strategies and tactics, as well as actionable advice to help your company thrive, in your inbox every month.
Ask the author a question or share your advice