For companies looking to raise funding, often using the stock markets can seem a complicated and confusing option. However, in the UK we benefit from having some of the best regulated and most successful stock markets anywhere in the world. Regardless of this, many growing businesses here are not provided with the necessary information and support to tap into this rich source of capital. Post-recession, the UK stock markets still have some of the deepest pools of investment capital anywhere in the world ready to invest in growing companies.
Equity or debt
Companies generally have only two ways to raise money to expand their business. They can either borrow money through debt financing, usually from banks, or sell some of their stock via equity financing.
There are a number of disadvantages associated with debt finance;
- A company has to pay back a loan with interest
- Post the recession, Banks have been particularly risk averse and lending to companies has reduced significantly
Equity finance – the traditional model
Traditionally seed financing was often used by companies with no trading history. First round financing was then geared towards a company which had undertaken research and development and was ready to grow. This type of equity finance often took the form of a convertible bond. At the second round stage of financing a company is looking to accelerate growth either organically, or through acquisitive growth considered flotation (IPO) as a funding option.
UK Stock markets
In 1995 The London Stock Exchange launched AIM (The Alternative Investment Market). This was considered by some market commentators at the time as folly. The market was designed specifically for young, early stage, growing companies, some of which had not gone through the traditional rounds of funding.
The entry criteria was so flexible that companies required no minimum profit or trading history, meaning that, in effect, a startup business could float on AIM. Since 1995 some start up businesses have indeed floated on AIM, although this still remains relatively rare.
AIM’s success led, in part, to other smaller stock markets such as PLUS (ISDX) and Sharemark (Asset Match) offering markets specifically for smaller companies.
Whilst smaller companies are well catered for by these markets, the largest stock market in the UK by value of companies listed has remained the London Stock Exchanges Main Market. The Market is home to around 1,000 UK overseas companies, over 200 of which have a value of over £1b.