Equity vs. debt: Covid-19 stability and recovery finance options

Equity vs. debt: Covid-19 stability and recovery finance options

There is no doubt that Covid-19 has resulted in unprecedented economic times and challenge, particularly for SMEs.

The Government responded quickly with a broad and significant package of economic support measures – ranging from grants, business rate breaks and the furlough scheme through to various loan and equity finance schemes to help businesses cope with the challenging environment. Whilst almost 900,000 UK companies have benefited from some form of government financial support for many it has been perhaps the first time they have needed external ‘finance’. For these businesses it has often been challenging to work out the best for of finance to access. Of course taking advantage of the ‘free’ sources of funding (grants etc.) is a no brainer. However, for many businesses a more significant and fundamental funding platform has been required to support them through these difficult times.

For this level of funding the long standing quandary of which is better, debt or equity, comes into play. With a number of the government funding schemes of this type coming to an end this month some businesses need to come to a quick decision as to the right source of funding for them.

Financial assistance = Post Covid-19 survival

While the overall concept of seeking financial assistance certainly isn’t new to businesses, never has it been so fundamental to organisations, across all sectors, as it is right now. With the furlough scheme moving towards an end having the right funding in place for the long term sustainability of your business is key.

Knowing which option will ultimately benefit your business isn’t easy. That loan you take out now may tide you over until the end of the year, but what are the mid to loan-term repercussions? What happens if you require further financial assistance after that? And is it equity finance or debt finance you actually need?

Roger Wood, MEIF Fund Principal and Midven Director, helps provide some clarity by exploring some of the equity and debt finance options currently available businesses. But before he starts with the top-level overview, let’s briefly explain….

What do we mean by equity and debt finance?

Equity finance

Equity financing involves raising capital by selling shares in your company. This is usually the most appropriate option if a company does not have sufficient asset security to support debt facilities, (i.e. property, plant and equipment) or isn’t sufficiently or consistently profitable enough to service the interest and capital repayments on a debt facility . Equity finance is longer term by its very nature and does not seek personal guarantees either, but does ultimately require a return usually through the ultimate sale of the business further down the line.

The biggest ‘challenge’ with equity finance is that you lose controlled of your businesses. Or at least this is certainly the received wisdom. Yes you will not own 100% of your business going forward, but that does not necessarily mean you lose control. If you find the right equity partner they will work with you as a partner to help you grow your business.

The most common examples of equity finance providers include business angels, venture capital firms, crowdfunding platforms and the stock market.

Debt finance

Debt funding requires repayment over an agreed term and also attracts an ongoing interest rate, both usually payable on a monthly basis. Debt finance is, as intimated above, generally secured on the assets of your business. Either specific assets or by way of a debenture over all of the assets and sometimes even over the Director’s own assets through personal guarantees. This gives the lender potential control over your business in the event that you do not meet interest and capital repayments. As such the ability to service debt, through ongoing and sustainable profits is key and is often the key to the ability to secure debt in the first place.

Debt finance as you would expect is typically sourced through the high street banks, although increasingly companies are looking to alternatives beyond the bank with which they have a historic relationship. There are an increasing range of smaller challenger banks (e.g. Aldermore, Starling) who have demonstrated a different risk appetite for lending and also a growing plethora of peer to peer lending platforms. Peer to peer platforms initially started out life as a way of matching companies with individuals wanting to lend to them. In recent years, they’ve grown to become more of a commonplace funding stream, with the source of their fund-raising including institutions, such as the Government and pension funds.

Midven offer two equity finance options – GB EIS Fund and MEIF West Midlands
Finance type: Equity

There are a range of other equity finance options available including business angels and crowd funding, all of which are underpinned by tax relief benefits to investors. Generally business angel investment is targeted at earlier stage propositions that funds managed by venture capitalists such as ourselves. Midven has two specific sources of equity funding available to companies at this time.

MEIF WM – the MEIF West Midland Equity fund is a £35m midlands specific equity fund and part of the larger Midlands Engine Investment Fund initiative which still has a number of years to run.. Regionally focussed funds are generally more likely to invest during difficult times, and indeed we have made 4 new investments during lockdown and provided significant further funding to our portfolio. Equity funding of upto £2m is available to companies located in the region, that have a long term growth plan.

GB EIS Fund – this is Midvens own EIS fund targeting innovative and growing companies in Greater Birmingham and beyond.

Equity or debt – which option is best for your business?

The current economic climate has been, and continues to be, challenging for organisations sector-wide.

While debt is already a reality for some companies and an option for many more, it’s not the only option. Where possible, businesses should certainly consider equity as a long term funding solution to ride the current economic storm and steer their way to Covid-19 survival.

If you have any queries about the points mentioned above or would like to find out more about the GB EIS Fund or MEIF WM, contact us on enquiries@midven.com or 0121 710 1990. Alternatively, complete our investment form.

In the meantime, for more practical insight that you can implement now to help your business overcome the challenges of Covid-19, take a look at this article, ‘Four key things businesses should consider during a crisis.’

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