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First published in the Sep/Oct issue of the SME Magazine
|Raising capital is one of the most fundamental requirements of any business. While not always an immediate concern, business owners should nevertheless plan ahead as there will usually be a point where capital will need to be raised for expansion.
Even businesses that have a stable cash flow or are cash-rich should consider external funding in order to diversify their risk.
Enterprises can seek funding from various sources, depending on where they are in their life cycle. Funding options include angel funding, venture capital, private equity, banks, capital markets as well as various government funding initiatives.
However, there is more than just the monetary aspect to raising capital. Investors which provide funding can also offer valuable insights, knowledge and advice which a business can take advantage of.
Sources of capital
For start-ups and small businesses, financing sources include family, friends and angel investors. It is often difficult for such businesses to obtain funding from banks and private equity due to size and visibility of their track record.
A key advantage of raising capital from family and friends is that they seldom demand control over the business. On the other hand, angel investors, who are often experienced businessmen, may expect control provisions as part of their investment.
Mature businesses that have reached a stage of growth with steady profits and a stable customer base will generally find it easier to raise financing from banks and private equity funds. They could also consider going to the equity capital markets if they are able to meet listing requirements.
While bank financing is generally the least expensive financing option, banks may require additional security including personal guarantees particularly when the company is not listed.
Companies may sometime not choose to tap the capital markets due to the costs associated with preparing for, and maintaining a stock exchange listing.
Another notable but less common source of potential funding comes from the increase in family owned investment firms setting up regional offices in Asia.
The deepening problems in Europe have encouraged investors to look towards Asia, and family owned investment firms are following suit. In an effort to familiarise themselves with the local market, these firms tend to start out with a minority stake in local enterprises in sectors that they are familiar with.
In recent years, with the aim of the Government to groom local enterprise, Government funding is another potential means of raising capital. The Government has a number of debt and equity schemes that are designed to help the enterprises at any stage of development may tap into.
Some of the better known Singapore Government initiatives include:
- Start-up Enterprise Development Scheme (SEEDS), an equity financing programme aimed at start-ups wherein the Government will match every dollar raised by the start-up from private third-party investor(s) up to a maximum of S$300,000.
- Local Enterprise Finance Scheme (LEFS), a fixed rate financing programme offered by SPRING Singapore to assist local enterprises to upgrade and expand their operations.
- Internationalisation Finance Scheme (IFS), developed by International Enterprise Singapore, which aims to enable the expansion of local companies overseas.
Developing a relationship with financiers
Irrespective of the source of capital, opportunities sometimes exist for enterprises to obtain expertise from their financier. Developing a mutually beneficial relationship with an investor or banker can therefore be crucial.
While enterprises may be apprehensive about the level of involvement investors may demand, these investors usually bring with them extensive experience. What is important is that transparency must underpin the relationship between a business and its investors. Businesses should share information with their investors, even if it appears to be unfavourable.
Investors — whether angel investors, venture capitalists or private equity funds - can also offer assistance to an enterprise beyond funding. They can offer expertise to an enterprise beyond funding. They can offer expertise to help the business improve its strategy or even develop new plans.
The more information the business shares, the more assistance its investors can give.
The same goes for financial institutions. Enterprises often keep their relationship with banks at a purely financial level, without taking advantage of a bank's expertise. As a bank's client, a business can sometimes draw on their banker's advice without incurring further cost.
Most banks have a dedicated team to serve their enterprise clients and these teams could work with the business to identify the best financing options available.
Business owners should thus take advantage of opportunities to engage their financiers, whether angel investors, venture capital, private equity and banks more regularly.
Factors that attract investors
All investors require an enterprise to fulfil certain basic criteria before they will consider funding it. One key factor is a sound business model and business plans.
The enterprise needs to demonstrate that its revenue is stable and has the potential for growth. The business should also be well managed with qualified and experienced staff.
Investors are also more likely to favour a business that has established or is establishing long-term relationships with its customers, suppliers and other business partners.
Different types of investors also have different appetites of risk, depending on where an enterprise is in their stage of growth.
Angel investors are usually more open to risk, and will consider funding a business based on its potential for growth taking into account the enterprise's business plan, level of innovation in product/service offering and speed to market.
Banks are likely the most conservative in their approach and will focus on stability and sustainability of the business' model.
When looking to raise capital, no matter the choice of financing, what is therefore important is that an enterprise must be willing to offer transparency to its financier, and to accept its financier as a long-term business partner rather than just a source of funds.
This article is contributed by Benjamin Ong, Executive Director, Corporate Finance and Sumit Punwani, Director, Corporate Finance at KPMG in Singapore. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.