The Advantages of Venture Capital Vs Bank Loans
Venture Capital isn’t the only answer. But it’s one of very few answers if you want to take your business to a materially different level. Many other financial routes are closed off in the current climate and non financial adjustments, whilst potentially positive, will not have the same impact.
Recruitment attracts entrepreneurs. The UK is without doubt one of the global hubs for recruitment. There are more agencies in London than there are in the whole of the US, but that does make it difficult to stand out from the crowd.
Venture Capital vs Bank Loans
Taking a meaningful step forward with a business usually requires some sort of investment and in general there are 2 recognised financial routes. The first is a bank loan and the other is venture capital (or private equity).
If you pursue the bank loan route bear in mind, as a recruitment company is not an asset backed company (except its debtors which typically attract finance for working capital) it’s never been easy to borrow money against a recruitment companies future profits, given that the assets leave the office at 6pm every night and hopefully return the next day.
Traditional banking has never been more difficult than it is now. There are many reported situations in the last few years where companies have borrowed from a bank, have been able to repay the interest but have been in breach of the long list of banking covenants. These covenants are scrutinized intensely by super-keen analysts, who seem all too ready to press the alarm bell, sending in the bank’s friendly business sustain team. In turn, this often leads to them calling in the administrators… and the rest is history… in many situations.
Undoubtedly the dangers of obtaining bank loans have never been greater, peppered with high charges, conditions, meaningful ratios and draconian penalties, if you can get past the hurdle of getting one in the first place.
The different method of raising finance is by attracting an investor such as a venture capitalist, whereby you sell a piece of your equity in return for long term investment. However, this is hardly a piece of cake either. Nevertheless, it’s generally regarded as the best credible different to a bank loan.
Benefits of Venture Capital Specialist;
Knowledge; If you choose a venture capitalist with experience, or preferable a focus, in your chosen market you will gain a partner with important insights and functional experience.
Advice & Mentoring; Their skill will be extremely useful in terms of acquisition or strategic advice, management infrastructure, series planning and of course exit. If you haven’t been part of an exit before, an experienced partner will be highly useful, both with functional advice, business preparation and contacts in the market. They’ll then not only add value in general but will unlock the value of the equity, a specific skill which many owners don’t however have, because they haven’t needed to.
Understanding; The right VC partner will take the time to understand your business. If they have experience of the recruitment industry, they will understand the cause and effect of recruitment specific issues such as seasonality, payment cycles and drop-outs. consequently, they will make more informed decisions and will understand that the assets in the business are the people.
Additional Financing; If additional financing is required in the future, then a VC will provide important sustain either via increasing bank lending or by investing further themselves.
Contacts and Networks An investor, especially one well connected to the recruitment industry, should be able to utilise their wide range of contacts by their business networks, from PR agencies to edges, from accountants to marketeers. Everyone who can help take your business to a new level and beyond.
Attracting investment can accelerate your company’s growth exponentially. If chosen wisely, it can help sustain your plans and take some of the strain from the senior management.
Traditional bank loans are difficult to acquire now and are inflexible. I would also argue that they are light on additional benefits. VC’s can add real value from their experience and contacts, especially if they are industry experienced professionals who have held executive management roles and have functional experience of adding value. In addition, where a VC is investing it’s own money you can be sure that their commitment to wealth creation for all equity stakeholders will be 100%.