Sufficient capital is the life blood of any business. Economic cycles have in the past had an impact on the availability of funding and this year has thrown into the equation the impact of Covid-19 pandemic.
Our experience across a diverse range of businesses and industries has seen some benefit from increased sales as a result of the pandemic. In the reverse we have seen some businesses severely hit.
Both having resulted in different funding arrangements.
In this article we take a positive look at the ways to fund business growth.
How to fund growth?
There are basically two ways to fund growth:
So should you fund or seek equity?
A simple way to ascertain what your company’s position is to use a financial ratio known as the Debt to Equity ratio. It is a simple calculation being the total liabilities on your balance sheet divided by total equity. This shows you what type of financing your business is more reliant on – debt or equity.
A ratio of 1:1 means you have an equal proportion of debt and equity. In general, you want a mid-to-low level ratio. The higher the ratio, the higher risk your business is to financiers.
Debt funding Options
- Short term financing (such as bank overdraft or short term unsecured loan)
- Long term Finance (term loans)
- Asset Finance (to purchase vehicle and equipment assets)
We can assist with arranging all business loans through Banks and other financial institutions. We even have access to business overdrafts that generally require no additional property security
Family and Friends – This is an option however we recommend that you tread carefully – The importance is to remember that despite the friendship this is a business transaction. Any arrangements should include obtaining legal and financial advice to ensure appropriate paperwork is in place that reflect the agreed arrangements. The reason for this is whilst everything can appear fine at the start it can turn sour if a problem occurs (with repayment) or a clear understanding on the arrangements is not in writing.
Equity Funding Options
- Investors (Including family and friends above)
- Crowd funding
Investors, usually want partial ownership in the business. While that means that the owner gives up ownership in the business it can prove better than debt (as usually a percentage of profits is paid). It can also mean that the investor can increase their percentage to provide additional cash into the business particularly during growth with the reliance on debt. Whilst owners often resist losing a percentage of their business in the long term they can in fact create more wealth (particularly in a growing business). To find investors it is recommended that you have a discussions with your accountant or lawyer. There are a number of investors seeking to finance start-ups or growing companies.
Crowd funding is a relative new arrival in Australia. It is governed by the Crowd-sourced Funding Act 2017. The rest of the world has been able to play in this space for years, and Australian investors can finally participate in equity crowdfunding too. The new legislation provides a regulatory framework for Crowd-sourced Equity Funding and enables a large number of individuals to make small financial investments in exchange for an equity stake in an enterprise. Under this legislation, Australian companies can raise up to $5 million from investors each year. There are serious consequences for breaching the law – so if you are considering starting a crowdfunding campaign, seek advice from your accountant and lawyer before you start to raise funds.
And other options:
- Sell assets
- Government Grants – The Australian Government and States/Territories have various grants available. You can find out more here
Which method is preferred?
This depends on your business and your debt/equity position and the stage of your business journey (start up, growth phase or mature)
Whether you are seeking a loan or seeking investors now more than ever you need to have your financial paperwork in order. More than anything, you need to have a clear understanding of your financial position.
- You need up to date current financial statements (Profit and Loss/Balance Sheet)
- A business plan
- Budget (with assumptions)
- Any other relevant information (contracts etc.)
The people providing the funding or investment need to know clearly how their investment will be repaid in terms of the arrangements you are proposing.