At the heart of Santander’s Breakthrough programme is a commitment to provide up to £200 million in growth capital to some of Britain’s most ambitious and dynamic small and medium-sized enterprises. It’s widely recognised that SMEs are vital to the health of the UK economy, and fast-growth businesses in particular play an important role in creating jobs and driving growth. However, despite their importance, businesses with the potential to expand rapidly often find it difficult to obtain the funding they require.
Growth opportunities and risk are close bedfellows. A business launching into a new market or diversifying its product range may have to make a significant investment without any guarantee of a return. For companies with a turnover of between £0.5-25 million, the finance options are particularly limited. Private equity investors – who are very much in the business of providing growth finance – are usually only interested in larger companies, while conventional bank lending is often not available for projects that could be classified as speculative.
Here’s where Breakthrough Growth Capital comes in. Designed for fast-growing SMEs, it aims to provide growth capital to companies that might otherwise find themselves at the centre of the so-called ‘funding gap’.
What is Breakthrough Growth Capital?
With £200 million available, Breakthrough Growth Capital offers investment in the form of a mezzanine loan. Mezzanine finance is a well-established tier of funding, occupying a position in the capital structure between conventional bank lending and private equity investment.
Recognising that business owners often regard any dilution of their shareholding as expensive in the context of future growth and therefore fundamentally unattractive, the mezzanine finance facilities offered through Breakthrough Capital Growth do not have an equity component. The money is advanced solely in the form of debt, repayable at an agreed point in the future. In other words, the bank receives its return solely through interest repayments, with the rate set at 5% over LIBOR paid quarterly and a further 5% rolling up, but may be higher subject to risk analysis.
This may be more expensive than a conventional bank loan but when compared to the cost of capital associated with a private equity investment it’s a relatively inexpensive way in which to fund growth. Private equity investors typically seek a 30% rate of return, which is obtained by taking a sizeable stake in the business. The 10% return on our Growth Capital Fund is significantly less and with no dilution.
Of course, private equity companies offer value in addition to the funding they provide. Typically, they will put businesses in touch with useful contacts and place experienced non-executive directors on the board. The Breakthrough programme doesn’t get involved to this extent but it still gives funding recipients access to advice from some of Britain’s most prominent and successful businesspeople.
The facility is also cashflow-friendly. As suggested, when a business takes advantage of funding through the Breakthrough programme, a 5% margin plus LIBOR is payable at quarterly intervals throughout the term of the loan, with payment of the remaining 5% – plus the capital sum – all rolled up to the point at which the debt matures. This effectively means that the cash call on the business during the term is relatively low, with the capital repayment held over until the business has delivered on its growth objectives. Unusually, companies that find themselves in a position to pay back the debt early can always do so without penalty.
The maximum investment that any company can raise through the Breakthrough programme will be around £5 million. However, it’s important to point out that this is in addition to conventional senior debt bank lending. There are no set limits on the minimum amount but businesses seeking less than £0.5 million may find it more cost-effective to consider alternatives.
Who is eligible?
Every business is different and Santander will assess applications for mezzanine funding on a case-by-case basis rather than setting extensive eligibility guidelines. However, there are just a few important criteria.
The funding isn’t intended for start-up or pre-revenue companies. What we’re looking for are profitable businesses with a track record of profitable and cash generative growth (20% per annum would be a good rule of thumb) stretching back at least three years. The quality of management is also important. Businesses seeking to take advantage of the funding should have in place a strong team with sufficient experience to deliver on their growth plans. This doesn’t necessarily rule out businesses with gaps among directors, provided there is an awareness that skills are lacking and there exists a willingness to bring new people on board. Clearly, with reporting and cash management disciplines key, finance is a crucial area.
A fully prepared business plan isn’t necessarily required, at least in the initial stages of the application. If the idea is there, the Santander Growth Capital team is willing to roll up its sleeves and work with managers. As part of that process we’ll talk through issues such as the business model, costs and investment payback as well as a wide range of prevailing risk and mitigants. We’ll also test and sensitise the projections provided by the company.
The application process
The starting point is your local Santander relationship manager. Local managers know both the businesses in their area and the trading environment. It therefore makes sense that they should be the first contact in the application process. Once an initial assessment has been made, details of the applicant will be sent to the Santander Growth Capital Team. We will then visit the company, spend quality time with managers and work towards presenting a compelling case for investment to our Committee.
For companies with a turnover of up to £50 million, Santander’s Growth Capital initiative can not only provide an effective alternative to private equity funding but also give SMEs access to funding that would otherwise be unavailable.