Scaleups are missing out on alternative growth financing

Kane Fulton, February 4, 2021 4 min read

This article was sponsored by BOOST&Co.

Traditional venture capital (or VC) tends to hog the limelight when it comes to scaleup financing, but what if founders would rather not part with equity? SME-specific loans (i.e. venture debt) may not be as celebrated as venture-backed raises, but this alternative source of financing can also fuel dramatic business growth.

Venture debt allows founding teams to retain far more equity in their company. It’s also cheaper: equivalent equity investments typically cost three-and-a-half times more.

So why isn’t borrowing a go-to strategy for small companies with big ambitions?  Unfortunately, eligible companies can be put off by the impression that loans – especially those that are currently dominating the market – are for urgent, necessary business maintenance or recovery, rather than for value-adding business development.

In reality, scaleups can use these loans (and conventional venture debt) for a wide variety of purposes, from R&D and M&A activity to bridging the gap in order to break even, hitting key milestones on the way to triggering higher valuations in future equity rounds, and even positioning for an exit.

The UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) is a case in point. With the extended deadline – 31 March 2021 – fast approaching, it’s time for scaleups to consider why and how they could put this source of growth financing to use.

Why the time is right for CBILS

The CBILS scheme was announced as part of a raft of new proposals designed to support the economy during England’s first lockdown. The initiative is 80% backed by the government and offers term loans, revolving credit facilities and invoice finance of up to £5m, with no interest fees for the first 12 months. Funds can be transferred in as little as two weeks, making it ideal for companies seeking a fast turnaround time.

It is the type of growth product that businesses with strong growth ambitions for the next 12 months should have on their radar, so why is there a danger that eligible companies in droves could miss out on its benefits?

Many companies were excluded from CBILS due to its original application criteria (lifted from the European Union’s state aid framework), which ruled out businesses making a loss as of December 2019. As a number of startups pointed out in an open letter, early-stage companies intentionally operating at a loss to prepare for future stages of high growth were discounted, even if they had since begun to generate profit or had broken even. In September 2020, the British Business Bank changed its guidance so that this condition would not be backdated to December 2020, but instead assessed on the date a company submits a CBILS application.

Take-up of CBILS has also been hampered by a misconception among business owners, advisors, accountants and corporate finance teams that it only exists to help struggling companies survive, rather than push dynamic companies to thrive.

But this myth needs to be dispelled: CBILS is a diverse product that can be tailored to help with anything from acquisitions to investment in R&D, or hiring new staff. Alternative finance providers such as BOOST&Co and Growth Lending, which both operate across the UK, are enabling scaleups to push the limits of what a loan can do.

CBILS in action

Stories of SMEs being rejected for recovery loans by their banks are increasingly common, because traditional lending providers are often unwilling to lend to pre-profit companies that have sunk significant capital expenditure into areas such as R&D. For those companies, CBILS is an attractive alternative.

BOOST&Co’s flexible range of loan products, in addition to its strong history of working with innovative SMEs in the tech space, means it is well-positioned to step in and help to fund tech firms during the pandemic.

Already, the firm has helped a number of companies acquire CBILS loans, including Manchester-based fintech Total Processing. The company will use its £5m loan to massively scale up operations, bolster infrastructure, hire new staff and make acquisitions.

Cameron Lee, CEO at Total Processing, says that the funding will enable the company to speed up its growth across domestic and international markets. “We plan to scale the business significantly over the next 12 months, creating more than 30 additional jobs in the UK, during a time of volatility across all sectors,” he says.

Oxford-based Extrinsica Global builds and manages complex hyperscale cloud computing solutions in Microsoft Azure. Having secured a £3.5m CBILS loan from BOOST&Co, it plans to accelerate its R&D programme, which involves developing IP that the company has been working on for 18 months.

As Extrinsica CEO Simon Smith explains, the loan will enable the company to develop the greater level of automation technology required to implement its cloud computing solutions, taking its capabilities beyond what would be possible through simply hiring more people.

“In the hyperscale cloud environment, there is a capability to implement new ideas quickly and to introduce cutting-edge platform services, neither of which can be matched by traditional in-house IT teams,” he says. “Our expertise means that businesses can very quickly reap the benefits that hyperscale cloud computing solutions offer.”

By plugging the funding gap and supporting the SMEs that form the backbone of the UK’s economy, BOOST&Co and Growth Lending, as well as alternative finance providers more generally, support Tech Nation’s own mission of helping the country’s tech firms to generate economic prosperity.

  • Find out more about BOOST&Co’s growth loans (including CBILS) and connect with the team on LinkedIn
  • Read about Growth Lending’s offer (including three CBILS products) and meet the team on LinkedIn
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