Seeking capital development: when, why and where

Capital may refer to anything a business uses that explicitly or implicitly supports the revenue stream. Increasing output of a product or service is the most obvious goal of capital development, but when day-to-day business operations are invested in, this can also lead to greater economies of scale and ultimately, without actually increasing sales, in more revenue coming in than going out.

Technology may also be a means to expand a business with the lowest possible financial risk. Adopting new software tailored for specific business needs, whether in accounting, marketing or logistics, may help reduce labour costs and increase productivity.

“There is so much new technology coming out of the fintech sector that many SME owners simply aren’t aware of, but could be exploiting,” says Convertibill marketing manager Damian Kenny. “In our own line of business, we have used tech to take much of the administrative waste out of the lending process. The use of technology allows businesses to get approved quicker and get finance quicker.”

Knowing what’s best for your company’s capital growth depends on questions only you can answer. Performing some serious internal due diligence would be prudent before making any decision.

“I always say, the best thing about my job is the clients and the worst thing is also the clients,” says Donnchadh Cullinan, manager of growth capital and banking relations for Enterprise Ireland. “Every enterprise is different. We have clients in food, software, life sciences etc, all with very different needs when it comes to capital development and expansion.

“For example, the variables involved in moving a software company overseas, as opposed to a furniture company, are obviously very different. SMEs need to understand what their specialist requirements are. It will vary tremendously from one firm to the next.”

This is why alternative lenders, such as Close Brothers, are growing in popularity so fast. Their bespoke approach to finance means that each of their clients is treated differently, depending on circumstance.

“Most people aren’t making simple purchases with us,” says Ciaran McAreavey, managing director of Close Brothers in Ireland. “This means our solutions in the SME market are tailored to what a customer wants.”

The majority of banking operators will fund an SME in capital development mode based on two criteria: the security that’s available and the capacity for repayment.

“Either one of those can act as a cap on the amount we can lend, so it’s important to know the true value of your asset types,” says McAreavey. “You may, for example, have a digital printer that was worth €100k when you bought it, but as soon as it leaves the office it’s immediately worth half that.”

Other assets hold their value and have a relatively definable second-hand worth. Assess whether your business can afford to pay for those in the event things don’t go as planned.

“Some clients want to explore options in terms of hiring equipment, and one of the things we can do is an equity release,” says McAreavey.