The advantages of venture capital versus bank loans
Venture capital is not the only answer. But it’s one of the very few answers if you want to take your business to a fundamentally different level. Many other financial avenues are closed in the current climate and non-financial adjustments, while potentially positive, will not have the same impact.
Recruitment attracts entrepreneurs. The UK is undoubtedly one of the global recruitment hubs. There are more agencies in London than in the entire US, but that makes it difficult to stand out from the crowd.
Venture capital versus bank loans
Taking a significant step forward with a business usually requires some kind of investment and there are generally 2 recognized financial paths. The first is a bank loan and the other is venture capital (or private equity).
If you’re going the bank loan route, keep in mind that since a recruitment company is not an asset-backed company (apart from its debtors, which usually raise working capital funding), it’s never been easy to borrow money against future profits of recruitment companies given that 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 have been many reported cases over the past few years where companies have taken out bank loans, managed to repay the interest, but breached a long list of bank covenants. These covenants are being scrutinized by super keen analysts who seem all too ready to sound the alarm, sending the bank’s friendly business support team. In turn, this often leads them to call the admins… and the rest is history… in many cases.
Undoubtedly, the dangers of getting bank loans have never been greater, laced with high fees, 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 funding is by bringing in an investor as a venture capitalist, where you sell some of your equity in exchange for a long-term investment. However, this is not easy either. However, it is generally considered to be the best reliable alternative to a bank loan.
Advantages of a venture capital specialist;
knowledge; If you choose a venture capitalist with experience or preferably a focus, you will gain a partner with significant knowledge and practical experience in your chosen market.
Advice and mentoring; Their experience will be extremely useful in terms of acquisition or strategic advice, infrastructure management, 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 training and market contacts. Then they will not only add value overall, but also unlock capital value, a specific skill that many owners don’t yet have because they haven’t needed it.
understanding; The right VC partner will take the time to understand your business. If they have experience in the recruiting industry, they will understand the cause and effect of specific recruiting issues such as seasonality, payment cycles, and attrition. Therefore, they will make more informed decisions and understand that the asset in business is people.
Additional funding; If additional financing is needed in the future, then the VC will provide important support either by increasing bank lending or by investing further themselves.
Contacts and networks An investor, especially one who is well-connected in the recruitment industry, should be able to use their wide range of contacts through their business networks, from PR agencies to banks, from accountants to marketing specialists. Anyone who can help you take your business to the next 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 pressure off senior management.
Traditional bank loans are difficult to obtain now and are inflexible. I would also say that they are light for added benefits. VCs can add real value from their experience and contacts, especially if they are experienced industry professionals who have held executive management roles and have hands-on experience in adding value. In addition, when a VC invests their own money, you can be sure that their commitment to creating wealth for all shareholders will be 100%.
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