There are many different types of funding to consider when you're looking to grow your business. Show
You must consider many factors when exploring growth funding options, including:
Every business will have different reasons for sourcing finance and every funding proposal will have its own unique features. Learn about the types of funding sources and how to choose the best funding option for your business. On this pageFind related content on this topic – read more about the basics of funding your business. Debt financeFinancing through debt means sourcing funds from a third party and agreeing to pay the money back, with interest, by a future date. Debt funding is often provided through loans from financial institutions, including:
Advantages of debt financing
Disadvantages of debt financing
Equity financeFinancing through equity is when funds are sourced from a third party with an agreement to give the investor a share of the business. The main difference between debt finance and equity finance is that the investor becomes a part owner of your business and shares any profit the business makes. Through equity investment, the investor is granted a certain percentage of equity (shares or units) in your business. As security for this investment, the investor will generally want some influence over business decisions (e.g. being on the board of directors). Some investors, such as family or friends, may prefer to be silent investors and only contribute the funding due to a lack of knowledge or time. Main sources of equity capitalSelf-financing, or bootstrapping, is where you put your own money into your business without borrowing large amounts of cash. This is often essential in the early stages of a business before you can prove your potential to investors. Bootstrapping is the fastest way to finance a business as you're not relying on other sources of funding which may require a long application process. You're also risking your own money – you won't be in debt to others if your business doesn't take off. Being self-funded has many advantages, including:
A bootstrapped business can often struggle with a lack of resources, and your ability to grow may be limited until you can find further investment. You may need to be creative and innovative with how you solve problems and very careful with managing your cash flow and funds. Asking family members for an equity investment can be a quicker way to access funding. Make sure you consider the following issues before asking for, or accepting, finance from family and friends.
A business angel is a high net-worth individual who invests directly into businesses for equity. As well as providing funding, they will usually bring expertise to your operations as someone who may have worked in your industry. A business angel will want solid returns on their investments either by profits or a share in the ownership of your successful business. Business angels are often entrepreneurs who have been successful and want to give back to their industry. Business angels will generally invest in early stage businesses and are usually willing to wait longer for returns. Before you commit to partnering with a business angel, consider the potential disadvantages, including:
Venture capitalists are fund managers who invest other people's money into private businesses in return for equity in the business. This equity is later released through an exit strategy, such as floating the business on the stock exchange, which can create the substantial return on investment required by the fund manager. Venture capitalists often finance high-risk projects. You may not need to repay invested funds to the venture capitalist if you don't end up turning a profit, as long as the investment is not in the form of debt. Venture capitalists usually have access to networks which can provide recruitment, potential customers, other investors and partnering opportunities. Venture capital funding often comes with tighter restrictions than funding provided by angels. This is because the venture capital fund must make a return on investment by a specific date to the owners of the investment money (e.g. 2-4 years). In particular, they want to see how their investment or original equity is protected. Investment conditions can include the running your business in a predictable way and implementing control mechanisms in case events threaten the investment. The rights of both parties are written in a negotiated agreement. When approaching venture capitalists, you should have prepared a business plan with:
This pitch is important for making your business stand out amongst the many opportunities a venture capitalist will be offered. Venture capital is usually the most expensive way to fund your business. The returns expected will be many times the original venture capitalist's investment, compared with debt funding, which will be a percentage interest rate return. A public float raises money for your business by issuing securities, such as shares, to the public. The process of moving from being a private to a public company by issuing shares available for the public or traders to purchase is known as flotation. Benefits include gaining access to new finance and potentially making it easier for investors to realise their investment. You will also need to consider factors like market fluctuations, cost of flotation and your new obligations to shareholders in running the company. Advantages of equity financing
Disadvantages of equity financing
Learn more about raising public funds for your business. CrowdfundingCrowdfunding is a type of funding which relies on people to donate money and share networks and resources to support a particular project. In return for their support, 'backers' are offered incentives such as free merchandise, sessions, or products. This has become a popular way to fund new projects, as small amounts of money can quickly become a large amount when sourced from large groups of people. It allows your business to be validated by your potential customers before you officially launch, and you don’t need to give up equity. It is commonly done through crowdfunding websites. Crowdfunding is an effective tool for starting or expanding a business. You could use crowdfunding to access capital, support, exposure, and a new customer base. Reputable crowdfunding websites will allow you to:
Usually, you will be required to set a certain funding target, and your project will only be funded if you receive enough pledges to meet your target. If your project does not raise enough funds to meet your target, anything raised will be returned to your backers. Advantages of crowdfunding
Disadvantages of crowdfunding
Steps to a successful crowdfunding campaignThe following steps will help create a successful crowdfunding campaign.
Crowd-sourced fundingSeparate to crowdfunding, crowd-sourced funding (CSF) is a type of financial service set up by the Australian Government where start-ups and small businesses raise investment from a large number of small individual investors. Under the CSF program, eligible public and proprietary companies can make offers of their shares, via an intermediary CSF service, using an offer document. To be eligible, you must be an unlisted public company with less than $25 million in assets and annual turnover. Eligible companies will be able to make offers of ordinary shares to raise up to $5 million in any 12-month period. CSF is regulated by the Australian Securities and Investments Commission (ASIC). Learn more about crowd-sourced funding. Government grantsYour business may be eligible for financial assistance from the Australian, Queensland or local government. There are a wide range of funding programs for different purposes and industries to help new and established businesses grow and succeed. The eligibility criteria, amount of funds available, funding conditions and activities differ from grant to grant.
Working capital fundingWorking capital funding allows businesses to access finance which covers normal operating expenses when they may be experiencing low cash flow. This is normally a short to medium-term loan which is designed to keep businesses running until they recover their cash flow. Examples of businesses which may benefit from working capital funding include:
It's expected that this type of capital will be repaid reasonably quickly and is a short-term solution to keep the business running until finance is no longer needed. Common types of working capital fundingA working capital loan allows you to increase your short term cash flow, which helps your business survive through periods of low cash flow, or to scale your business to meet growing demand for your goods and services. The amount of a working capital loan will vary depending on the size and typical revenues of your business. You can access both secured working capital loans (where your loan is tied to an actual asset as collateral), and unsecured working capital loans. Unsecured loans are generally only available if you have a high credit rating, so aren't always an option for new businesses without a credit history. Overdrafts are a more traditional source of funding, where your bank will extend you a line of credit, allowing you to continue to draw money from your business account even though it may technically be empty. Overdraft accounts will have a set limit and operate like a credit card (the overdraft must be repaid by a certain date before incurring more fees). This can be a valuable and flexible way of securing short term funding that helps you meet your financial obligations through inconsistent cash flow. The terms of your overdraft will vary depending on your bank, but they can become costly if you don't manage it responsibly. You will often need to pay application fees, interest charged on the amount you overdraw, and then additional overdraft fees. Review the market to find the best available account option for your business. A revolving credit facility is another form of flexible funding, where you have an agreement with a lender to withdraw money up to a pre-approved amount to fund your business, and continue to repay and withdraw within your limit whenever you need. This is similar to an overdraft, though you don't need to have an account with your lender, and is more flexible than a term loan, as you can withdraw money, repay it and borrow it again until the end of your agreement. There's no fixed payment schedule, and your interest rate is usually variable. Many businesses offer goods and services to their customers on credit by fulfilling an order and then issuing an invoice, which may not be due for up to 30 days. Invoice financing lets businesses access loans based on the amount due from outstanding invoices, and is a way to fast-track cash owed for improving cash flow. This form of lending commonly sees a business 'sell' their invoices to a lender, who takes a percentage of the invoice as their fee for advancing the cash. You (as the business owner) keep control of invoice management and collection, and your customers have no idea that their invoice has been advanced. If your cash flow is only being held up by delayed or late invoices, this can be a great option for funding. Your maximum borrowing capacity will be limited by the total amount of your invoices. Similar to invoice financing, trade finance and supply chain finance are other options you can consider for increasing short term cash flow, though these are generally only offered to businesses who trade in physical goods. Supply chain finance is where the lender agrees to advance an invoice for specific buyers. Three parties are involved in this form of agreement: the buyer, the business owner/supplier (you) and the lender. This can be a good option if your customer might have a better credit rating than you. In this scenario, your customer is approved by your lender, and you may be able to take advantage by offering better payment terms, without affecting your cash flow (your customer can take an extended payment term, while you can still take immediate payment). Like invoice financing, you’ll forfeit a percentage of your total invoice as the fee to the lender (called the discount rate). Trade finance is almost the same, except that it's a lending arrangement to facilitate international trade, which makes it easier for businesses to import or export orders. Asset refinancing allows you to use the physical assets your business owns to secure funding. For example, if your business owns property or vehicles, you can use these as collateral to access a secured loan. This means you may be able to access cash amounts up to the maximum value of the assets you own. If you are unable to repay your financing, these assets may be reclaimed. Off-balance sheet financing is an accounting method where you record certain assets or liabilities in a way that prevents them from appearing on your balance sheet. It is a legitimate and permissible accounting method that is recognised by generally accepted accounting principles (GAAP), as long as GAAP classification methods are followed. This can be complex, so talk to your accountant or financial adviser before considering this financing. Off-balance sheet financing often occurs when your business may need to take on a loan that would breach existing creditor agreements. For example, when a business has a line of credit where they must stay below a certain debt-to-equity ratio, and a new debt would violate this agreement, and trigger a default. To avoid breach of contract, off-balance sheet financing allows you to acquire a new debt or asset without it being recorded on your balance sheet. This could be through:
Operating leases is the main form of off-balance sheet financing, as it allows you to access an asset (like property or equipment) which lets you scale and grow without having to purchase the asset outright. Your balance sheet only reflects the lease agreement costs, and the purchase is recorded on the balance sheet of the new entity. Recording the operating lease as an operating expense on your profit and loss statement results in lower liabilities on your balance sheet. Optimal funding sources for innovationThe funding sources that are right for you depend on your business needs and can be complex. As a rough guide, funding sources are outlined in this table:
Funding source key:
Also consider...
At what point is a business plan written?We found that on average, the most successful entrepreneurs were those that wrote their business plan between six and 12 months after deciding to start a business. Writing a plan in this timeframe increased the probability of venture viability success by 8%.
Who should write the business plan?The person or persons responsible for implementing the plan should be heavily involved in its development. Some people hire consultants or have employees draft the plan. If you're going to be accountable for the decisions that will be based on the plan, then you need to be involved in its development.
What investors look for in a business plan?More than anything, early-stage business investors want to see a return on their investment (ROI). If you can demonstrate that your business will make them money, then you're 90% of the way there. If your company has been up and running for a while, then you need to show excellent financial performance so far.
What is the purpose of writing a business plan before entering the market?The primary purpose of a business plan is to establish your plans for the future. These plans should include goals or milestones alongside detailed steps of how your company will reach each step. The process of creating a roadmap to your goals will help you determine your business focus and pursue growth.
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