Venture Capital vs Bank Loans
Taking a significant 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 (apart from its debtors which normally 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 cases 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 support team. In turn, this often leads to them calling in the administrators… and the rest is history… in many cases.
Undoubtedly the dangers of obtaining bank loans have never been greater, peppered with high charges, conditions, key ratios and draconian penalties, if you can get past the hurdle of getting one in the first place.
The alternative 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 alternative 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 considerable insights and practical experience.
Advice & Mentoring; Their expertise will be extremely useful in terms of acquisition or strategic advice, management infrastructure, succession planning and of course exit. If you haven’t been part of an exit before, an experienced partner will be invaluable, both with practical 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 yet 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. Therefore, 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 support either via increasing bank lending or through 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 through their business networks, from PR agencies to banks, 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 support your plans and take some of the strain from the senior management.