Business And Leadership, Ireland's Business News Service

In a particularly challenging environment, financing a business venture may seem like a scary prospect for aspiring entrepreneurs. But sourcing adequate financial support is of course a must for any business to develop successfully.

One template for financing business start-ups that is often cited is: one-third equity, one-third grant finance and one-third bank finance. However, requirements will differ from enterprise to enterprise.

While we hear much talk in recent days about existing businesses finding it hard to access funding and loans, start-ups may be in the unusual position of being at an advantage.

One banker told me that, in the current environment, banks with limited lending opportunities, and banks in general, are actually anxious to support promising start-up companies.

All of the banks have special deals for early stage companies and special introductory rates for start-ups, often considerably cheaper than what established businesses currently pay.

The banks will be reluctant to lend on a high-risk project, but excellent projects should always be able to access funds. This is where a well-thought-out, tight and accurate business plan will come into its own. Don't dream of approaching a bank with a fluffy, aspirational plan.

A good bank will meet with potential borrowers, and examine the person behind the business, their individual track record, experience to market and character. They will also look at the business plan and cash-flow projections for the next three years.

In a start-up situation, they will expect the business to have researched the market, to know the way it is going and to have carried out some form of stress test.

Banks will also generally look for equity from entrepreneurs, seeing it as a sign of commitment and a way in which the business will sustain more debt. That equity can sometimes come from grant assistance.

City and County Enterprise Boards

City and County Enterprise Boards provide support for small businesses with 10 employees or less. Capital grants are available for machinery and equipment purchases or for altering premises.

A capital grant can be given up to a maximum of €75,000. However, there are no capital grants for buying or acquiring buildings. Businesses will usually have to pay the full or part of these grants back - over 40pc in the Border Midland West region and over 35pc in the South and East region.

Employment grants of up to €7,500 for full-time positions are also available in both new and expanding projects, while grant assistance for feasibility studies is provided but subject to a maximum limit of €6,350.

Finally, start-ups may be able to avail of the Redeemable Preference Share Scheme, which offers equity finance of up to €75,000.

Enterprise Ireland

For those start-ups with export potential, Enterprise Ireland (EI) can offer much assistance, both financially and otherwise. Each year, the government agency approves around 70 high-potential start-ups (HPSUs).

Tom Hayes, manager of HPSU, EI explains: "These are companies, teams or individuals who have an innovative product, service or solution that has an export dimension to it. They'll also have the ambition to create or generate 10 jobs and turnover of €10m within three years."

EI can cover 50pc of the cost of feasibility studies, which can cost in the region of €20,000. Hayes says grants from EI can sometimes be approved in a matter of weeks, but this will not always be the case.

“It can take anywhere from eight to 10 weeks, or it could take 18 months to two years. We'll work to the agenda of the client," says Hayes.

The agency will carry out due diligence on businesses, and if a company is found to be viable, it can avail of financial assistance of up to €250,000.

EI will usually offer a mixture of grants and investment, whereby it takes out preference shares in the company. The maximum shareholding taken is 10pc, according to Hayes.

“We'll invest in the form of convertible preference shares, and we'll ask the promoter to try to find some matching funding. That source could be from BES [Business Expansion Scheme], their own money, from venture capitalists or through a bank."

Venture Capitalists

Despite the current environment, some venture capitalists are still alive and kicking in Ireland. Individuals who invest in businesses in return for a share or stake in that business, venture capitalists generally only invest in businesses that have built up a track record or those that have high growth prospects.

However, some venture capitalists will invest in start-ups, one of which is NCB Ventures, which manages the €75m Ulster Bank Diageo Venture Fund. Along with existing and growing firms, the fund also invests in start-ups.

“Our investment range is €0.5-€5m in each portfolio company, and investees will be sourced from a range of sectors, including ICT, support services, leisure and fitness, cleantech, waste services and engineering," says Michael Murphy, CEO of NCB Ventures.

“Over the past 10 years, we have learned that to bring a company to a level where it can scale up and start selling to international markets takes finance. Typically, it could take €10m to get a company through its development stages. When we're looking at a company, we're looking at its ability to scale up and compete."

In the current environment, entrepreneurs have to be realistic in their plans if they want to receive funding, notes Murphy.

“So if you're developing a product now, you have to be reasonably focused. What investors are looking for is evidence of your ability to get sales," he says.

While many investors will act as silent shareholders, typically, they will appoint somebody onto the board of the company. This can be a positive factor, with the new board member bringing extensive experience and knowledge to your young enterprise.

Business Angels

Not unlike venture capitalists, angel investors, or business angels, differ in that they tend to deal more with start-ups. Generally, they are greater risk takers and motivated by a desire to see new and innovative businesses get off the ground.

Along with finance, angel investors may offer timely advice to those starting out in business.

The Halo Business Angel Partnership is an all-island network that matches private investors with pre-screened investment opportunities in start-up, early stage and developing business.
In the first six months of 2009, the network completed 30 deals with €5.4m invested and was leveraging in another €7.4m.

Angel investors in the network generally invest in those companies that operate in the technology-based spheres or in internationally traded services. While the companies see Ireland as their seed market, they should have the potential to grow.

Business Expansion and Seed Capital Schemes

Both the Business Expansion Scheme (BES) and Seed Capital Scheme (SCS) can provide good financial opportunities for start-ups.

While associated, the two schemes do have fundamental differences. The BES, on one hand, provides tax relief for investment in certain corporate trades, while the SCS provides for a refund of tax already paid by an individual when that individual sets up sets up a business.

If you are an employee, unemployed or were made redundant recently and wish to start your own business, you may be entitled to avail of a tax refund under the SCS.

You could receive all the income tax you have paid over six years, depending on the size of your investment, and can even select the tax years for which you want to claim refunds. There is a maximum limit of €100,000, but the refund can be claimed immediately when the company starts to trade.

Meanwhile, the BES allows firms to secure funding while also enhancing their ability to attract further financing.

Unlike bank financing, where companies must make capital payments immediately, BES goes in by ordinary share and stays in the company for five years.

Companies can raise up to €2m on the scheme, but €1.5m in any 12-month period. Early stage companies typically raise between €200,000 and €300,000.

These are just some routes to finance, but before you think of approaching these sources, ensure your business plan is top dollar and you have you market research done. And, of course, have a well-prepared pitch.