Medium Term Finance

Up to 5 years

Medium Term finance are sources of finance available for the mid-term of between 3 – 5 years typically used to finance an expansion of a business or to purchase large fixed assets.  It is usually the larger amounts of borrowing or the use of the funds that differentiates medium sources of finance from short term, although a number of the short term options are available for the mid-term.

The annual cost of medium term finance will generally be less than short term finance and can be priced individually depending on individual circumstances.

Typical medium term finance options include:

 

Medium Term Finance - Types of finance

Enterprise Finance Guarantee
Nature: The Enterprise Finance Guarantee (EFG) is a government-backed scheme that is designed to make loan finance available to viable businesses that lack the security or a proven track record they need to obtain funding.  The Government guarantees 75% of the loan although the decision to provide the loan is still at the discretion of the lender
Types: The accredited lenders include banks, community development providers and invoice finance providers and as such types of finance covered by these institutions include bank loans, start-up loans and financing against your outstanding sales invoices
Length: The EFG scheme is available to small and medium businesses with an annual turnover of up to £41m who require funding between £1,000 and £1m, repayable over a period of 3 months to 10 years.
Cost: The cost of the finance is set by the finance provider once it carries out the usual credit checks and assesses the risks involved in making the finance available.  Indicative costs are given under the various finance types listed here and accessed by the links above.
Process: The nature of the funding and the finance provider will dictate the process that you would need to undertake to apply for funding required and the same process and information required for a commercial loan would be required for the provider to assess the application under the EFG.
Finance providers:

There are currently 46 accredited lenders including all main high street banks, community development finance providers and invoice finance providers, details of which can be found on https://www.gov.uk/understanding-the-enterprise-finance-guarantee

 

Business Finance Partnership - Small businesses
Nature: The Business Finance Partnership is a Government initiative to make different sources of finance available to businesses by providers other than banks.
Types: Providers have been appointed by the Government and each will have different finance options for small businesses, these will depend on the lender and include mezzanine financeinvoice financingsupply chain financepeer to peer lendingloans,  and asset finance.
Length: Due to the various types of finance available from the different providers each type of finance could be available for a different length of time depending on the purpose of the finance.
Cost: As above, the cost of finance will differ depending on the nature of the funding on offer from the different providers.
Process: In order to obtain finance under the Business Finance Partnership, you will need to make an application direct to one of the providers listed below, based on the nature of the finance you are looking for.  The process to apply will differ depending on the provider and nature of the finance being sought.  Any of the providers will however want to understand the business and the plan for the funding and therefore historic accounts, future cash flow and business plans will all be required to assist with the provider’s due diligence and credit checks to enable them to verify the business’ ability to repay.
Finance providers:

The lenders are appointed by the Government and are subject to change so please check the Government website: https://www.gov.uk/government/policies/making-it-easier-to-set-up-and-grow-a-business--6/supporting-pages/encouraging-private-sector-investment

As at 23 October 2013, the current appointed lenders are: Market Invoice, URICA, Beechbrook Capital, Funding Circle, Zopa, BOOST&Co, and Credit Asset Management Ltd. Details of the lenders are below:
Market Invoice has been awarded £5 million. It is an innovative online platform through which SMEs can raise funds by selling individual invoices to a pool of investors.

URICA is being allocated £10 million. It will establish a new supply chain finance platform to provide a consistent channel of cash from institutional investors to SME suppliers by enabling early payment of their bills to mid-sized growth companies.

Beechbrook Capital is receiving £17 million. It is a mezzanine fund manager and will establish a new fund to lend to SMEs focused on growth capital.

Funding Circle, which will receive £20 million. It is a peer-to-peer lender enabling British people to lend money directly to small businesses in the UK and offers a faster and more efficient way for businesses to borrow finance

Zopa will receive £10 million to offer in loans through peer-to-peer lending. Through its website investors can lend directly to small businesses, offering a more efficient way of helping firms to access loans

BOOST&Co, a new fund management company focused on lending to growing and innovative small businesses, will receive £20 million to set up a fund that will make loans between £1 million and £8 million to small businesses

Credit Asset Management Limited, a subsidiary of City of London Group plc which provides specialist financing to the SME sector, will receive £5 million to provide asset finance and professions loans.


Where do you find out more?
Further details can be found at https://www.gov.uk/government/news/70-million-boost-to-small-business-lending and http://news.bis.gov.uk/Press-Releases/Small-businesses-offered-110-million-of-new-finance-684c2.aspx

 

Start-up loan
Nature: The Start-up Loan programme provides support to young people to help them start up their own business. The scheme provides debt finance in the form of loans and mentoring support to applicants in England aged 18-30 who would not normally be able to access traditional forms of finance for a lack of track record or assets to use as security.
Types: The loan works in a traditional way with an agreed amount, a fixed rate of interest and a fixed repayment date. Capital repayment holidays are available, but interest must be covered monthly throughout.
Length: You will be required to pay back the loan within five years.
Cost: The interest rate is fixed for the period of the loan and the rate is currently 6%.
Process: To apply for a loan you should be at least 18 years of age (at the time of application) and can be up to 30 years of age (when applying for the loan), living in England, and interested in starting a business. The size of the loan will be determined by the business plan (there is no definite limit). All credit decisions will be made by the scheme’s delivery partners.  You can apply for a loan on the Start-up Loan website.
Finance providers:

The Start-up Loans Company has been established to deliver the scheme via delivery partners.
http://www.startuploans.co.uk/
http://www.startuploans.co.uk/faqs/

 

Seed Enterprise Investment Scheme
Nature: The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies to raise equity finance.  The SEIS offers a range of tax reliefs to encourage individual investors to purchase new shares in a company which meets the set qualifying conditions. There are various conditions that need to be met, some at different times and some continuously throughout the three year qualifying period. Investors can invest their money directly into a company or via an SEIS investment fund which in turn invests in a portfolio of companies.
Types: The funding for the business is provided by the investor who buys new shares in the company for which they make a payment.  In order for the investor to obtain the tax relief the company needs to have less than 25 employees with assets of fewer than £200,000 and meet other various ownership and trading qualifying criteria; one of which excludes companies that receive royalties or licence fees unless these arise from the exploitation of an right or asset which the company itself has created. The Company can receive a maximum of £150,000 funding under SEIS and overall the company can raise a maximum of £5 million in any 12-month period from the government’s three venture capital schemes – SEIS, EIS and VCTs.
Length: Usually equity investments are made for the medium to long term but in order for the individual to qualify for the tax relief, the shares must be held for at least three years.
Cost: Whilst the investor qualifies for income tax relief and capital gains tax relief, the business gains the funding it requires.  In issuing new shares in the company, the current shareholders are reducing their share of profits and passing this to the new investor.  The share of profits or level of return that the investor may request will depend on the risk that the investor perceives in not receiving back his initial investment and the length of time the investment is for and will therefore need to be attractive and will differ investor to investor.  You should, however, expect to incur legal costs for the preparation of relevant documents associated with an offer of shares under the SEIS, and there will be a further cost of your professional adviser applying to HMRC for what is termed “advance assurance” i.e. HMRC’s in-principle clearance that you qualify to raise funds under the SEIS.
Process: Any investor may want to undertake due diligence to understand the business and the level of risk they are undertaking in making the investment.  A detailed business plan and cash flow forecast including any historic or management accounts will be required.  In addition, it will be necessary to evidence that the company meets the qualifying conditions for SEIS and provide the investor with the necessary certificates for them to claim their UK tax reliefs.  In order to obtain the certificates, an advance assurance application is required to HMRC making certain declarations about the qualifying conditions; this application needs to be made on every issue of shares by the company.   You also need to bear in mind that SEIS is an equity investment process, and this means that you are selling a perhaps substantial proportion of the equity in your company, which in turn may affect the extent to which you will need to run the business in consultation with the investors involved.
Finance providers: There are a number of investment firms that specialise in investing in SEIS companies with funds raised from investors.   Several have dedications to media, music and other related investments.   Business angels and Angel networks also actively invest in SEIS companies and SEIS is available to individuals, family and friends and people in a business network may be a potential investor.  Further details can be found at
http://www.seiswindow.org.uk/
http://www.hmrc.gov.uk/seedeis/index.htm
 

 

Enterprise Investment Scheme (EIS)
Nature: The Enterprise Investment Scheme (EIS) is designed to help small higher risk trading companies raise equity finance by offering a range of tax reliefs to investors who purchase new shares in those companies. The company needs to meet the set qualifying conditions and there are various conditions that need to be met, some at different times and some continuously throughout the three year qualifying period.  Investors can invest their money directly into a company or via an EIS investment fund which in turn invests in a portfolio of companies.
Types: The funding for the business is provided by the investor who buys new shares in the company for which they make a payment.  In order for the investor to obtain the tax relief the company needs less than 250 employees with assets of fewer than £15 million and meet other ownership and trading qualifying criteria; one of which excludes companies that receive royalties or licence fees unless these arise from the exploitation of a right or asset which the company itself has created.  The Company can raise a maximum of £5 million in any 12-month period from the government’s three venture capital schemes – SEIS, EIS and VCTs.
Length: Equity investments which are usually  made for the medium to long term but in order for the individual to qualify for the tax relief, the shares must be held for at least three years.
Cost: Whilst the investor qualifies for income tax relief and capital gains tax relief, the business receives the funding it requires.  In issuing new shares in the company, the current shareholders are reducing their share of profits and passing this to the new investor.  The level of return that the investor may request will depend on the risk that the investor perceives in not receiving back his initial investment and the length of time the investment is for, the rate of return and will therefore need to be attractive and will differ investor to investor.  You should, however, expect to incur legal costs for the preparation of relevant documents associated with an offer of shares under the EIS, and there will be a further cost of your professional adviser applying to HMRC for what is termed “advance assurance” i.e. HMRC’s in-principle clearance that you qualify to raise funds under the EIS.
Process: It is likely that investors will want to undertake a more significant degree of due diligence  than with the SEIS model, above, in order to understand the business and the level of risk they are undertaking in making the investment.  A detailed business plan, and cash flow forecast including any historic or management accounts will be required.  In addition, it will be in order to evidence that the company meets the qualifying conditions for EIS and provide the investor with the necessary certificates for them to claim their UK tax reliefs.  In order to obtain the certificates, an advance assurance application is required to HMRC making certain declarations about the qualifying conditions; this application needs to be made on every issue of shares by the company. You also need to bear in mind that SEIS is an equity investment process, and this means that you are selling a perhaps substantial proportion of the equity in your company, which in turn may affect the extent to which you will need to run the business in consultation with the investors involved.
Finance providers: As with the SEIS, there are a number of investment firms that specialise in investing in EIS companies with funds raised from investors.  Business angels and Angel networks also actively invest in ESI companies and as EIS is available to individuals, family and friends and people in a business network may be a potential investor.  Further details can be found at
http://www.hmrc.gov.uk/eis/index.htm
 

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