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Rocking Horse Facility versus Equity Financing: What’s the difference?

Insights by administrator on 21st March 2023

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At Rocking Horse we devised a new finance product especially to counter a problem that many innovative companies faced.

The R&D tax credit scheme gives valuable incentives to companies undertaking research but the problem was that companies couldn’t access the cash until they had completed their year-end tax returns and had their claim approved by HMRC.

We established a method of advancing cash against those claims which helped businesses to continue with their project work.

So how does this compare with equity finance and which is best for development finance?

In this post
● What is equity finance?
● What is debt finance?
● One or the other?
● Which is right for you?

What is equity finance?

You’ll often hear the term ‘equity finance’ and we’ve found that there can be some misunderstanding about exactly what this means.

Equity finance is the practice of buying shares from the company which provides cash for the company to then use in its operations.

There is an important point here though. Note that equity finance has to involve the investor buying the shares from the company and not from a third party. If you buy shares in a company from someone else then they get the money and not the company.

When you are arranging equity finance you will sell a block of shares for a specific value. They can be ordinary shares that have both voting and profit-sharing rights or a special type of share that may have only profit or voting rights.

This last paragraph contains the main downside of equity funding. When you sell equity you are giving away some control, some profit or more likely both.

On the plus side, you can only pay a dividend on shares when you make a profit and when your company has distributable funds. This means that if you aren’t revenue ready and profitable then you won’t have any cost to the business under equity financing.

Typically you’ll hear equity finance called a variety of things such as venture capital, angel investment or private equity but at the end of the day, whatever label you attach it is still the sale of shares in some way or another.

One or the other?

This all begs the question of which method of financing is best.

In fact, it isn’t necessary to make a choice. Often, this kind of decision is presented as an either/or, binary choice but actually, that isn’t always the best way to think about business financing.

We’d argue that business financing is best thought of as a kind of menu.

The aim has to be to adopt a variety of different methods, all of which have different features to give your business a balanced financing structure.

Rocking Horse finance is relatively short-term and designed for a specific purpose, to bridge the gap between R&D tax credit expense and payment. It isn’t designed for long-term business support.

At the same time, equity financing often brings with it other benefits such as business angel support or access to networks as with venture capital.

Business experts always say you should match your finance to what it is designed to do so rather than making the either/or choice you should utilise a suite of solutions.

Which is right for you?

Choosing the type of finance that is right for your company really comes down to the stage of development of your business and what you are aiming to achieve.

Early-stage finance is often much better done through equity, which could be through personal funds, family and friends or external investors.

Debt finance is much better for specific development, especially when you are looking at investing in assets.

Rocking Horse finance falls in between the two, providing debt finance that can be used as working capital to invest in more research and development, thus adding more value to your projects.

Why not call us now and let’s see how we can help?