Business Finance Guide
Chapter 1: What is Business Finance?
Your brand-new business concept is ready to launch. Or perhaps you’re ready to expand your current company. You’ll need to find the correct small business funding if you don’t have the cash on hand to fund it yourself. But how do you know where to begin?
Your business financing options
The majority of capital for small businesses flows into one of two categories:
- Debt is when you borrow money and then repay it, usually with interest.
- Equity financing is when you raise money by selling a portion of your company to investors.
It’s possible that you’ll use a combination of loan and equity financing. Keep in mind that within these broad categories, there are numerous forms of finance.
What’s the right type of funding for your business?
Some types of funding are easier to obtain than others; others require more security; some are less expensive, and some have conditions. You must determine which type is most appropriate for your scenario.
It’s critical to discover funding that works for you. You’ve got a company to run. You don’t want your financial situation to get in the way of your plans. They should be used as a sail rather than an anchor.
Seven questions to ask yourself about getting business finance
There are a few steps you may take before knocking on doors to help you choose the correct type and amount of funding:
- What are you funding?
Is it a new company? Are you considering purchasing a business? Or are you looking to extend an existing one? Do you need to fix a cash flow issue? Different methods of small business financing are better suited to certain requirements.
- How much do you need and what will you spend it on?
Knowing how much money you’ll need, when you’ll need it, and what you’ll spend it on will help you narrow down your funding options. Check out the following chapter for information on how much you should borrow.
- Are your finance needs short or long-term, or both?
You may require short-term financing to get your business up and going, as well as longer-term financing to keep you afloat for the first few years. For each, you can go to a different location.
- How risky is your business?
Some sources of finance may be easier to get by if you have an established business plan. However, there are a variety of new company concepts available. Are you able to discover where your competitors acquire their money?
- What’s your history with business (or even personal) finance?
A excellent track record in business and in repaying debts, as well as an existing personal or business relationship with a lender or investor, may make it easier to borrow money.
- What will it cost?
You can’t acquire a loan without paying a fee or giving up something. You’ll either pay a lender interest or give an investor a portion of your profits. What will those costs be in the long run?
- Is it worth it?
Make sure the finance is worthwhile once you’ve calculated the cost. Will the extra cash help you make more money or improve your quality of life? What is the return on investment (ROI) in other words?
Some funding fishhooks
Some types of company finance may not be available to you.
Traditional lenders may be hesitant to take a chance on you if you’re new to the game. They have no way of knowing how well you’ve performed in the past or judging your ability to run a firm. And getting a substantial loan will be difficult if you don’t have any assets to put up as collateral.
For solo traders, equity funding is not a possibility. If you wish to sell a stock, you must be a corporation (although you can sell an interest in a partnership).
But don’t quit up just yet. There are many different types of company funding available, and knowing what you need will help you discover the ideal fit.
Chapter 2: How much business funding do you need?
Knowing how much money you’ll need and for how long will aid you in selecting the best sort of financing. Here are some pointers to assist you in determining a number.
Business budgeting tips
Calculating the amount of money required to establish, buy, run, or expand a business can be difficult. Here are some considerations to keep in mind as you go through the procedure.
Starting a business
- Building the business
Make a list of everything you’ll need to get started. Building fit-outs, trucks, equipment, uniforms, initial inventory, website creation, and promotion are all items to consider.
- Running the business in the early days
Calculate the cost of paying leases, salaries/wages, suppliers, and utilities on a weekly basis. Your initial earnings are unlikely to cover everything. How much extra money do you think you’ll need?
- Sneaky costs (commonly overlooked)
Permits, rental bonds, insurance, utility connections, bank fees, website hosting, marketing charges to enhance initial sales, and transportation costs are all things that startups overlook. Repeat sure you don’t make the same mistakes.
- Wiggle room
Put a cushion in your budget in case things don’t go as planned. If things take off, you may need cash to recruit more people, or your costs may rise if a low-cost supplier goes out of business.
Don’t just get into the business; stay in business.
It’s easy to get preoccupied with the costs of starting (or buying) a business. Look past that. Consider how much money you’ll need to manage the business. In the beginning, your revenue is unlikely to pay those expenses.
Uniforms, office gear, work supplies, and automobiles will all be included in the initial price.
Transportation, energy and utilities, inventories, and consultants will all be included in the operating costs.
Buying a business
- Get a valuation
An expert appraisal will assist you in determining the value of a firm and will inform you if pricey equipment has to be replaced.
- Check the books
Have an accountant review your business’s financial statements for the previous two years to ensure that it is profitable. Expect a temporary drop in revenue while clients adjust to the new management.
- Work out the cost of change
Will you be rebranding, recruiting more employees, purchasing additional equipment, or experimenting with new marketing strategies? Calculate the amount of money you’ll need to invest.
Running a business
- What is a working capital loan?
If a big customer pays late, an unexpected payment arrives, or you have a terrible month of sales, day-to-day costs can be difficult to afford. Working capital loans allow you to keep your business up and operating while you recover.
- How often will you need one?
You may believe that you only require working capital loans on a sporadic basis, but search for patterns. If it’s consistent and predictable, it could have an impact on your financial plan.
- Avoid the high-interest trap
Short-term and flexible working capital loans are common. As a result, they have a lot of interest. It will become costly if you require a large number of them. Engage the services of an accountant to analyse your debt on a frequent basis. It might be worthwhile to refinance some short-term debt into a longer-term loan with a reduced interest rate.
Growing a business
- Make a budget
Make a list of all the costs associated with the upgrades, item by item. Obtain a cost estimate for each. Consider whether you’ll need to operate at a reduced capacity while the changes are completed.
- The hidden costs of growth
Determine how your operating costs will change as a result of the growth. You may require additional inventory or personnel. Check to see whether your budget allows for it or if you can receive a working capital loan.
- Make sure it’s worth it. Calculate the return now that you know the costs. It’s probably not worth financing unless it would increase your revenues or make your business comfier. Calculate the cost-benefit ratio.
- Consider your finance options. Could you afford it if your vendors give you more time to pay? Perhaps you could work out a deal? Alternatively, your vendors may be able to contribute some funding. Investigate everything.
- Think about cash flow
It’s important to remember that investing too much of your own money in a purchase can backfire. If you deplete all of your reserves, you may be forced to take out a short-term loan, which has higher interest rates.
Get an accountant to look at your numbers
Obtaining financing is always costly. A blunder here or a miscalculation there might have far-reaching consequences. It’s a significant step to take on debt or allow investors into your company. It’s fine to crunch the figures yourself, but get advice from a professional first – they’re the budgeting and money experts.
Chapter 3: Debt versus equity finance
Do you need a small company loan or are you looking for investors? Examine the advantages and disadvantages of debt versus equity financing for your small business.
Debt versus equity finance
The majority of financing falls into one of two categories. You can either take out a loan or sell a portion of your company to investors. Let’s take a look at the primary benefits and drawbacks of debt versus equity to see how they might help or hurt your organisation.
The difference between debt and equity funding
Debt is a loan that must be repaid. When you sell an interest in your company to someone else, you get equity funding. They’re two very distinct things.
This does not have to be a binary decision. At times, a combination of debt and equity financing may be the best option for your company. However, it’s important to understand what you’re getting yourself into with each.
Chapter 4: Main types of finance
To make money, you must first have money. Learn about the various types of financing available to most businesses.
Main types of finance
To make money, you must first have money. So, what are the many financing choices available? The following are the several types of financing available to most businesses.
Common finance options
- Term loan: A lump sum payment made over a set period of time.
- Line of credit/credit card: Funds that can be used whenever they are needed
- Peer-to-peer lending: A loan made possible by crowdsourcing
- Friends and family: When friends and family members lend you money
- Invoice financing: You’ve received an advance on the bills you’ve sent out.
Equity finance (investors)
- Equity crowdfunding: Where the general public can invest in your company
- Angel investors : Individuals who put their own money into the market
- Venture capital : Professional investment groups
- Friends and family : When those close to you buy into the business
- Incubators and accelerators: Development schemes to build and boost small businesses
The type of finance you choose matters
When you’re desperate to buy, start, or build a business, you may believe that any amount of money will suffice. Don’t get caught in that trap. Choosing the wrong form of financing now could break or severely hamstring your organisation later.
Each sort of financing has its own set of advantages and disadvantages. Learn more about them with the help of this guide. Inquire about which matches your company and you as a person, because both are important.
Begging, borrowing, and bootstrapping
Some businesses may not necessitate a large sum of money or capital to get started. If you’re providing a home-based service like proofreading or accountancy, you might only need a laptop and an internet connection.
Other firms begin small, with little money, and gradually grow. This is referred to as bootstrapping. Owners frequently scrounge together their own funds through personal savings, personal loans, or working extra shifts at their day job in these situations. Even if you are, it is worthwhile to be aware of the many sorts of loans available. You could simply need a little additional cash down the road to get the firm moving in the right direction.
Chapter 5: How to get a business loan
One of the most frequent ways to finance a business is with a business loan. Find out how they work and where you can acquire one.
One of the most typical ways to finance a business is to take out a business loan. Let’s take a look at how they work, who’s behind them, and how you can get your hands on one.
Types of loans
The two most common types of business loans are:
A lump sum payment that you receive all at once and must repay over a predetermined length of time.
Line of credit
You can dip in and out of a fund pool with customizable repayment levels and only pay interest on the money you spend.
What are term loans?
Term loans include personal term loans, business term loans, startup loans, business mortgages, commercial property loans, and asset loans. The objective of the loan is indicated by these names, which may affect the amount you can borrow.
Term loans differ in terms of interest rates, repayment terms, and security requirements. Let’s have a look at those possibilities:
Interest rates and repayments
- Fixed: Over the course of the loan, you lock in a single interest rate. Budgeting and forecasting will be aided by this. If you pay back the loan before the end of the fixed term, you’ll almost certainly be charged an early repayment fee.
- Floating (or variable): The interest rate may rise or fall. If the interest rate rises, so do your payments. However, if it falls, you can either lower your payments or keep them the same to pay off the loan sooner. Floating rate loan repayments are frequently more flexible; you can adjust the monthly amount at any time, pay lump sums anytime you want, and even pay off the entire loan early without penalty.
- Secured: You may find it easier to borrow and receive a higher amount if you can present some form of valuable asset or personal guarantee as security. However, if you default on your payments, the lender has the right to claim the security as their own. Some lenders may issue partially secured loans, in which the collateral isn’t worth the whole amount of the debt.
- Unsecured: This is a more costly but less dangerous option in which you promise no security. Interest rates and costs are usually higher, and getting a loan with a bad credit history is difficult. You can also borrow a smaller sum of money.
Long-term investments, such as the purchase of a firm or big assets, are frequently financed through term loans. They’re also a smart option for firms with consistent revenue because they allow them to budget repayments, and term loan interest rates are lower than line of credit interest rates.
The longer you’ve been in business, the more likely you are to be approved for a term loan. Lenders prefer to see a proven track record.
What is a line of credit?
Revolving credit, overdrafts, and credit cards are all examples of credit lines. They provide you with additional funds, but you will only be charged interest on the fraction of the funds that you use.
- Interest rates and repayments
You only pay interest on the money you’ve borrowed. You won’t have to pay back the money if you don’t utilise it. However, you might have to pay a price to use the facilities. If you go over your credit limit or pay late, your interest rate may skyrocket, and you may be charged late fees.
It is possible for it to be secured or unsecured. Unsecured credit lines typically require less capital and have higher interest rates.
Short-term financing is frequently provided by business lines of credit. They can assist you in weathering seasonal lulls or covering unexpected expenses. They’re also useful for expenditures that are too big for a credit card but not big enough for a term loan.
Line of credit or business credit card?
A business credit card offers the advantage of being useful for internet purchases and unforeseen needs while also separating your business and personal spending. Some additionally provide an interest-free period, reward programmes, extended warranty insurance on purchases, and liability waiver insurance against the misuse of other cardholders. As an added plus, they make it easier to track and categorise your expenditure.
They do, however, offer higher interest rates and costs than a line of credit, as well as lower credit limits. They may also require a personal guarantee, which could harm your personal credit report if payments are late. It’s also worth checking with the provider to see if the protections and services are comparable to those supplied by personal credit cards.
How to apply for a loan
Lenders want to know you’ll pay them back in the end. Take your time preparing relevant paperwork, double-check that you have everything you need, and carefully follow the instructions.
You’ll need the following items to apply for a business loan:
Your business strategy should describe the scope of the opportunity and how you intend to capitalise on it. You should also demonstrate to the lender how the loan will be utilised. The most important risks should be recognised, together with a strategy for dealing with them.
Provide a budget that shows how you’ll be able to pay back the loan. If the loan is for an existing firm, the lender will require two years of profit and loss statements, as well as tax returns if applicable. The budget should be attainable and based on reasonable expectations.
Banks want to see that you’ve paid your obligations and debts on time. They’ll look at your credit rating or credit score in both your professional and personal lives.
Although not all loans are secured, if you wish to borrow a large sum of money, you will be requested to provide collateral. If you give some sort of security, you run the danger of the bank seizing it if you don’t make your payments. If you give a personal guarantee, you run the danger of being sued if you don’t return the debt.
If your company becomes the next big thing, lenders aren’t concerned. They don’t own any of it. They adore a consistent, predictable income. So you don’t need a wow factor to get a loan; all you have to do is show that you’re a safe bet.
How technology can speed up your application
If you utilise software to keep track of your business finances, applying for loans can be a lot easier and faster. This is why:
- You can save time. You won’t have to print, fill out, and exchange financial reports with the lender if you share them directly from your programme.
- You can get a decision sooner. The lender will be able to analyse your application more quickly if you provide them direct access to financial records.
- Lenders will see an accurate representation of your business.Accounting software makes it easy to keep your financial information up to date, allowing the lender to understand how your firm is progressing more clearly.
Check to see if your lender can connect this manner with your accounting programme.
Types of lender
The main types of lenders are:
- traditional banks
- online and alternative business lenders
- peer-to-peer lenders
Banks come in all shapes and sizes, with some being global, others national, and yet others regional or community-based.
Traditional banks frequently provide the best business loan interest rates due to their size. They can also put together a package for you that includes a variety of financial services. They might, for example, combine a term loan and a line of credit with bank accounts and company insurance.
When it comes to processing and approving loans, banks aren’t as quick as some alternative lenders, but they’re improving. If they have digital access to your financial records using online accounting software like Xero, they may be able to make faster choices.
If you have the following, banks are more likely to approve your loan application:
- you donated a significant portion of the funding (or can provide reliable security)
- having prior industry experience or a track record in business
- you should have a solid business plan
It might be difficult for startups to obtain large bank financing. Before you spend time on an application, go to a bank manager, accountant, or bookkeeper to check whether yours will be accepted.
Online and alternative business lenders
Many internet lenders specialise in finance and do not offer any other services. Some are experts in specialised industries.
These lenders may be more approachable than banks if you’re a startup business with a blemished credit history or no security.
They tend to specialise in short-term, unsecured loans and work much more quickly than regular banks. They accept online loan applications and may be able to approve your loan in as little as one day. However, their rates, fees, and terms may not be as competitive as those offered by established banks. That’s how they manage the risk of offering unsecured loans.
People who need loans are matched with people (or institutions) who are prepared to fund them through peer-to-peer (P2P) lending platforms. The application procedure, repayments, and, if necessary, security are all overseen by the peer-to-peer platform.
Online application and approval processes are often faster than those of banks. You may not receive all of your funding from a single source; instead, you may receive contributions from a number of sources.
Typically, the loans are fixed-rate, short-term, and smaller in size than those issued by regular banks. Interest rates may also be lower than those offered by a traditional bank.
What’s the right type of lender for you?
Make sure you don’t go to the first lender you come across. Make a list of possible lenders and compare them based on criteria such as:
- Are there any lending products available (do they have good term loan and credit deals?)?
- Interest rates, fees, and penalties for early repayment
- Lending limitations
- The competence and authority to make swift loan decisions
- small and/or local business friendly
- what additional services they provide that you might require (such as deposit accounts, international services, business insurance)
Consider approaching a provider if you have personal bank accounts with them. They’ll be able to see how you manage your personal accounts immediately, which could work in your favour if you’ve been a good client. If you have a bank mortgage, they can check to determine how much equity you have available to utilise as collateral for company loans.
Consult an accountant or a business advisor for recommendations on which lenders their clients have found to be helpful.
Section 5.1 Peer-to-peer lending
Peer-to-peer lending is a new way to get money for your small business. What is the process like, and what are the benefits and drawbacks?
Learn about friends and family loans, as well as invoice finance, in this chapter.
Peer-to-peer (P2P) financing arose as a result of the global financial crisis of 2007 when traditional loans became scarce. So, what exactly are they and how do you get your hands on one?
What is peer-to-peer lending?
You just borrow from strangers through peer-to-peer lending. An internet platform connects you with people who are eager to lend money. Debt crowdfunding, crowdlending, and marketplace lending are all terms used to describe this type of lending.
Initially, these platforms only offered personal loans, but they have since grown to include business lending (sometimes called peer-to-business or P2B). Some of the most powerful platforms have even formed relationships with financial institutions.
How does peer-to-peer lending work?
- On the peer-to-peer lending platform’s website, you fill out an online application. Explain why you need the loan, how much you need, and how long you want to pay it back.
- The software evaluates your application and assigns a risk score based on aspects including creditworthiness, security, and revenue expectations. The interest rates are decided by the platform. (Interest rates can also be established through a reverse auction, with lenders competing for the lowest rate.)
- If your loan request is granted, it is uploaded to the platform for interested lenders to view and decide how much they want to offer you based on your risk rating and interest rates.
- You accept offers from one or more lenders if a rate appears to be attractive. Alternatively, if no one is interested, the site will take your listing down.
- The website serves as a middleman, facilitating the movement of funds and coordinating repayments and security.
Why people choose P2P lending
These loan platforms are less expensive than traditional banks because the service is provided online. As a result, they are able to provide competitive interest rates.
Lenders are drawn to the opportunity to earn bigger returns than they would in a bank savings account or a term deposit. They can also safeguard themselves by distributing their loans among several debtors.
Greater accessibility, speedier application processes, and reasonable lending rates all appeal to borrowers. Peer-to-business lending platforms may be a preferable option for newer enterprises with little credit or cash flow history, as well as those with poor credit scores or odd or inventive loan requests.
Fees paid by both parties are how the loan platform makes money.
Section 5.2, Friends and family loans
If you follow a few criteria, borrowing money from friends and family to fund your small business can succeed. We’ll show you how to do it safely and responsibly.
In this chapter, you’ll also learn about invoice financing.
Friends and family loans
Many businesses have been launched with the support of mum and dad’s bank. It’s frequently available when other forms of credit aren’t. All you have to do now is take a few extra measures.
They can work well
We wouldn’t have Walmart, Motown Records, GoPro, or Amazon if it weren’t for the good old family loan. Her husband would not have been able to construct his first cyclonic vacuum cleaner in the late 1970s without a loan from Mrs Dyson.
How to borrow responsibly from family and friends
There’s nothing wrong with taking out a loan from a family member or a friend to start a business. Nobody knows you better than you. Plus, they’re more likely to offer you better, more flexible loan terms. For example, they might not require any security, won’t charge you an application fee, have lower interest rates (or none at all! ), and let you skip a few payments.
However, there are some rules to follow to avoid turning your pals into courtroom litigants or having them cut out of the will.
Pitch as you would to a bank or investor
Maintain a professional tone while remaining approachable. Demonstrate why lending you money for your business is a wise decision.
- Expect them to chip in only a portion of the money; clarify what you’ll be putting in and what you’ll be getting out.
- Make it plain to them how much you require and why.
- Show them your budget so they can see how you plan to spend their money responsibly.
- Explain the risks and highlight the best and worst-case scenarios. Be upfront and straightforward, and moderate their expectations.
- Make sure they realise that if a family emergency arises, they won’t be able to get their money back right away.
- Show them how and when you’ll pay them back.
Loan, investment, or gift?
When taking money from relatives or friends, this is one of the most common misunderstandings. Ascertain that all parties are aware of the circumstance, particularly other family members who may believe you’re ready to squander their inheritance on a fantasy.
- Investment vs loan
If you don’t want a friend or family member telling you what to do, a loan can be a better option. In the chapter on debt vs equity finance, you’ll learn more about the differences between an investment in your firm and loans.
- Loan vs gift
If you don’t pay interest or make payments, the ATO may levy tax or penalties on the person who loaned you the money. Keep the regulations in mind.
Put it in writing
Make a written record of your agreement. It can be used to prevent misconceptions from the start and to resolve conflicts.
If it’s a loan, make a record of the following:
- the amount borrowed
- the interest rate (if applicable)
- the length of the loan, including the start and end dates of repayment
- repayment terms – monthly payments or a one-time payment when the company reaches a certain stage; whether early repayment is acceptable
- security (if applicable)
- penalties for late or non-payment – Increasing the interest rate, modifying the loan terms, adding extra charges to the loan, obtaining collateral, or pursuing legal action, for example.
If you want to be extra safe, have a lawyer or accountant check over your documents. Check out our loan agreement template to get you started.
The deal will be significantly more complicated if it is an investment. The paperwork must specify how many shares the investor will get and whether they will have a role in business decisions. It should also state whether they will be held liable for business debts or lawsuits. Involve a lawyer and an accountant in the writing of one of these.
Always follow through
Keep your word and do what you said you’d do. Give the lender advance notice if things aren’t going as planned. You don’t want them to hear from Bob’s third cousin.
- Make sure you pay your bills on time. They won’t mind if you spend some money on yourself if they can see the money going back to them.
- Give them a report at the end of the year on how the business is doing, how much you’ve paid back, and any challenges you’re encountering.
- Maintain a professional demeanour and treat them with deference. A successful relationship with a friend or family lender can serve as solid evidence when it comes time to present your case to a professional lender.
Section 5.3, Invoice financing
When your cash flow becomes stagnant, invoice finance allows you to access funds. We’ll walk you through the process of invoice factoring and discounting.
Learn about peer-to-peer lending in this section as well.
Have you ever considered how much better your cash flow would be if everyone just paid what they owed you? You might not have to wait long if you can receive a cash advance on your outstanding invoices.
An alternative to traditional loans
Businesses that are running out of cash can take out a working capital loan, but many find the application and approval procedure difficult. Using invoice finance could be more convenient and flexible. This option is ideal for companies who invoice clients and owe them money.
Invoice factoring and invoice discounting are two of the most frequent types of invoice financing.
What is invoice factoring?
You can take your bills to a factoring business instead of waiting for clients to pay them. The following is how it works:
What is invoice discounting?
Another option to get immediate cash from your invoices is to use invoice discounting. Discounting, on the other hand, allows you to keep ownership of the bills. The following is how it works:
Inquire about what happens if the consumer does not pay when choosing an invoice finance company. In rare situations, the financial institution may bear the brunt of the loss. It may fall to you in some cases.
Faster invoice financing
Your invoicing or accounting software can be used to process invoice financing online. You mark the invoices you want to fund, and the provider evaluates your application within a few days (or even a few hours). These online providers will also transmit automatic updates to your accounting software, including information on part payments and fees on each invoice.
What is cash flow financing?
Invoice finance is comparable to cash flow financing. Instead of selling invoices, the company obtains a loan secured by its anticipated cash flow.
This enables a cash-based company to obtain capital quickly to satisfy needs it would otherwise be unable to meet. For example, a party supply store may be able to purchase a large quantity of balloons at a discounted price, but it must pay in cash right now. It wouldn’t normally have enough cash until the 15th of the month, when a couple of significant party planner customers make regular purchases. It takes out a short-term cash flow loan to cover the balloon payment and then repays it as the money arrives.
Chapter 6, How to find investors
Rather of taking on debt, small businesses can raise funds by enlisting the help of investors. We’ll go over the various types of investors and where you may locate them.
You might raise cash by selling a portion of your firm rather than going into debt. This is referred to as “equity financing.” Let’s take a look at the different types of investors, what they want from your company, and where you might find them.
Types of investors
Due to the rise of the tech industry, equity financing has become more common in recent years. Private equity investors saw the promise, put their money in, and were highly rewarded. Banks were less willing to risk these types of businesses, but private equity investors saw the potential, put their money in, and were richly rewarded. It spawned a more powerful investment community.
Ordinary people can now invest in a firm due to the relaxation of investment limitations.
The following are the most common sources of equity financing:
Angel investors are rich individuals who put their personal money into a firm in exchange for a portion of ownership. They usually want to be a part of business choices and may want to sell after a few years. If you can present them with a profitable exit option, it will help. An angel investor is someone who wishes to put money into your business or community.
This permits you to raise funds from the general public in exchange for unlisted company shares (equity). This is often for consumer items or services (not B2B), and you’ll do better if your company’s plans have a wow factor.
Professional investment firms that invest their clients’ money in return for a significant stake in the company. VCs seek to invest in firms that they believe will grow rapidly and massively.
Friends and Family
Those loved ones who put their money where their mouth is to support your dreams. As an initial step, many aspiring entrepreneurs look here. Some people only do it as a last option.
Incubators and accelerators
Small business incubators and accelerators exist to help start and grow new firms. Some will concentrate on a single industry, such as technology. Accelerators, rather than incubators, are more likely to have seed money to invest because they are focused on scaling a firm that they believe has potential rather than on invention.
Are you ready for equity financing?
For every sort of business, equity financing is not a viable choice. It is not appropriate for solo traders. If you wish to sell a stock, you must be a corporation (although you can sell an interest in a partnership). So, before you go down this road, make sure you have the correct business structure in place.
How big is the pie?
Larger investors may be put off by a huge number of stockholders in the future. So think about how many investors you’d like to bring on board. Consider how you want to structure any deal in relation to the debt you already have or may take on in the future.
Know your worth
Get a professional business appraisal to find out how much your company is worth. Then you’ll know exactly what you’re trading or selling for money.
Talk to a lawyer and an accountant about the legal and financial ramifications of equity financing before committing to it. You’ll need to research and comprehend any present or upcoming regulations and legislation that you’ll have to follow.
Where to find equity financing
The first step in obtaining equity financing is to determine which types are legal in your area. Equity crowdfunding sites, for example, are not authorised in all countries. Equity crowdfunding is legal in the United States, the United Kingdom, Australia, and New Zealand.
Information about registered venture capital and crowdfunding platforms, as well as any regulatory requirements, should be available on central and local government websites.
Other locations to look include:
- Business incubators and accelerators. They may be able to invest seed money (to assist establish a business) and have access to angel investors.
- Small business and industry associations.They might be able to provide information about equity funders with whom their members have had success.
- Your accountant or bookkeeper. They may have worked with other clients who were successful in obtaining equity finance. Alternatively, they may have clients interested in becoming angel investors.
- Your bank. They may be able to connect you with equity investors or venture capitalists.
- Friends and family.They may be more patient in waiting for a return and less eager to leave the company. They may also know of others who are looking to invest.
What makes a good investor for your business?
When evaluating investors for your business, it’s always a good idea to look a gift horse in the mouth.
While it may be tempting to respond with a resounding “yes, please!” when someone offers you money, resist. Investors aren’t all created equal. Here are some qualities to look for before you end up with someone who is incompatible with you. They should ideally be:
- local – because you can communicate with them and they don’t forget about you
- in your industry – that you can benefit from their knowledge, enthusiasm, and connections
- connected – so that they can put you in touch with the right people
- committed – therefore they’re committed to staying with you for the long haul
The appropriate investment can contribute more than just money. They can help you expand your business by sharing their knowledge and connecting you with the right individuals. They may, for example, introduce you to new customers, excellent suppliers, lawyers, accountants, bankers, other investors, business advisors, or media contacts.
What does an investor want to know about your business?
Investors want to know if you’re going to generate a profit for them. They aren’t attempting to steal your ideas. To be safe, make sure you file the relevant patents, trademarks, and copyright paperwork before beginning to work with them.
It aids in comprehending what makes an investor tick. You can make a lot more convincing pitch if you know what they want from you. They desire:
- Growth potential
They’re taking a bigger risk than a bank, so they’re expecting bigger rewards. They want to invest in enterprises that they believe will take off.
- Involvement in the business
Most people desire to protect their investment by actively participating in the company’s growth. They’ll want confirmation that you’ll pay attention to their suggestions and act on them.
- Dividends or climbing share value
They’re investing in the hopes of making a profit. This can be in the form of a dividend (earnings split among shareholders) or an increase in the company’s worth (so they could potentially sell their shares). You must demonstrate that you will be able to deliver one of those items. And keep in mind that in order to assist them in selling their stock, you may need to sell yours as well!
- Personal investment
Why would they be enticed to invest if you’re not willing to put any of your money into the business? You’ll have to contribute a significant amount of money.
- Your exit plan
If you want to build the business quickly and sell it, let them know. Alternatively, if you’re in it for the long term. Neither strategy is inherently flawed. Your investors, on the other hand, will want to know your plans.
How can you impress potential investors?
Demonstrate that you want to make money with and for them, rather than just taking it from them.
What’s your plan?
Demonstrate excellent financial thinking and a robust business plan. They want to see that you can grow quickly and that you have a strategy for raising the company’s value and producing high returns.
What’s their plan?
Discuss their plans as well. What direction do they think the company will go, and how involved do they want to be?
Take the time to prepare the appropriate paperwork and fill out all of the required information. Send them your prepared materials ahead of time so they may study them before the meeting.
Check how you look online
If your business has an online presence, keep in mind that potential investors might look you up to learn more. Is there anything you don’t want them to see that you don’t want them to see? Is it possible to use social media to your advantage and demonstrate the potential for growth through your fans and customers?
Being good in pitching is a good indicator that you’ll be good at running a business. Check out our section on putting together a financing pitch.
Are you looking for an angel?
VCs, crowdsourcing, and accelerators can only help a small percentage of startups. If you can’t do either, you’ll most likely require an angel. Our following chapter delves deeper into them.
Section 6.1, Angel investors vs venture capitalists
Are you considering bringing in angel investors or venture capitalists to help you grow your company? Our simple guide will show you how to tell them apart.
In this section, you’ll also learn how crowdsourcing works.
If you’ve ever read about successful startup enterprises, you’ve probably come across the terms angel investors and venture capitalists (VCs). Here’s a rundown of what they’re all about and how they differ.
What’s the difference?
Angel investors put their own money into a business, whereas venture capitalists put other people’s money into a business. They’re both equity funding sources, meaning they invest in exchange for a stake in the company.
What are they?
They’re people who put their own money into your firm in exchange for a piece of it, and they frequently offer mentorship and guidance as well. While some angel investors invest on their own, others form groups – flocks – to make investments in firms.
Who are they?
They don’t have to be wealthy philanthropists with large sums of money, though it is a plus. They could be accomplished business individuals who have been in your shoes and can see the potential in your company. They could be industry specialists or simply folks who care about what you’re attempting to accomplish.
When do you want them to appear?
Angel investors frequently invest early in a company to help it get off the ground or to help it grow after it has started.
Where do you find them?
Angel investors are frequently discovered through effective networking. Speak with people in your sector, your accountant, lawyer, business advisor, networking groups, and even your customers. It’s possible that the man who bought new bulldozer tracks from you yesterday is the one with the golden pockets.
If you require help with your bookkeeping, you can give us a call on (03) 8568 3606 or email us on [email protected].
Why do they get involved?
They’re not in it for the love of it; they’re in it to earn a profit. They may be patient and eager to invest for the long haul, but many of them like to cash out after a few years, which could mean selling the company. Before you say goodbye to a piece of your ambition, make sure this is the type of finance you desire.
What are venture capitalists?
They’re professional investors who are investing other people’s money (as well as some of their own) in your company. They typically take a far larger percentage of the company than an angel investor. They’re seeking for well-managed businesses with a competitive advantage that have the potential to expand rapidly. As a result, getting them on board is difficult.
Who are they?
They’re serious investors, so make sure you’re ready for what they’re looking for and where they want to take your company. Before approaching them, do your research to ensure that your company is a good fit for their interests, as well as when and how they want to invest. It’s likely that your company is just one of several that they’re funding.
When do you want them to appear?
Angel investors typically come in at a later stage than venture capitalists (VCs), when your company is ready to scale up and really take off.
Where do you find them?
If your business has been successful, venture capitalists may come looking for you, especially if you have an original product that has the potential to be a major moneymaker. While you can look for them on the internet, getting an introduction from an angel investor, business advisor, lawyer, accountant, or other industry source is the best alternative.
Why do they get involved?
VCs want to be involved in the business on a daily basis. They might join the board and desire a say in the decisions you make. In an ideal world, they’d like to see your company go public. It’s all about getting a good return on their investment for them. After all, they’re investing other people’s money. And it’s possible that they’re putting down millions of dollars.
Section 6.2, How crowdfunding works
Crowdfunding can help you receive the money you need to start a business and the attention you need to attract customers. We’ll walk you through the fundamentals of crowdfunding.
What is crowdfunding?
Crowdfunding is defined as a large group of people – the crowd – contributing money to a project. It might be for anything from a trip to a sporting event to raising funds for a larger taco truck.
There are four types of crowdfunding, three of which are applicable to small enterprises seeking investment. They can be especially beneficial to those who are unable (or unwilling) to obtain finances through traditional means.
People use this strategy to make an online contribution in exchange for a reward. The prizes may vary based on the amount provided, but they will almost always include the product or service you’re aiming to offer. For some people, this has replaced approaching family and friends for help with a project.
Backers are frequently rewarded with discounts, products, and services by startups. For example, if the project was a new board game, high-value pledgers might receive a copy, while lower-value pledgers might receive a discount when the game is launched.
For entrepreneurs looking to test the market, reward-based crowdfunding is ideal. It’s a safe bet that if their proposal doesn’t draw funding, it won’t attract customers. It’s also an useful source of capital for companies with truly creative products or long-term consumer relationships. It’s simple to capitalise on clients’ passion to obtain the dollars they require.
The following are some of the most well-known names in social crowdfunding:
- Kickstarter and Pozible (rewards)
- Indiegogo and OzCrowd (rewards/donations)
- GoFundMe and JustGiving (donations)
This type of crowdsourcing allows you to raise funds from the general public in exchange for unlisted company shares (equity). Unlisted shares aren’t traded on a regulated stock exchange and can’t be bought or sold there.
Offering investors a convertible note is an alternative to handing them stock. In this situation, the investor borrows money to the company in order to convert debt into stock in the future. This strategy is frequently employed when a company is still in the early stages of development and its worth has yet to be determined.
Equity crowdfunding is a superior option for generating larger sums than rewards-based crowdfunding. Because of the high sums at stake, equity crowdfunding platforms, also known as portals, are controlled by the government. There are limits to how much money can be generated, invested, and how often it can be used.
The Australian Securities and Investments Commission (ASIC) regulates and registers equity crowdfunding platforms (Australian Securities and Investments Commission).
Peer-to-peer lending, often known as debt crowdfunding, works similarly to a term loan from a bank. You don’t get the money from an institution; instead, you get it from individual people. More information on peer-to-peer lending can be found in the chapter on the subject.
Four steps to start your own crowdfunding campaign
Do you have a project that requires funding? Or a strategy to grow your company? It might be time to expand that taco truck into a fleet.
- Select your platform
Begin by deciding whether you want to use a rewards or equity-based model. Find out how long campaigns can run on different platforms. That might be crucial. What is the maximum amount you can raise? Also, figure out who is going to view it. Different categories of backers may be attracted to different platforms.
- Get accepted by the platform
Fill out the online forms and provide any necessary documentation. The platforms must verify your legitimacy. If you want to use equity crowdfunding, you may need an offer document or prospectus. This outlines the investment specifics, as well as any risk warnings and investor cooling-off periods.
- Make your pitch
You’ll have a space to make your pitch after the platform has accepted you. Describe your project or concept, why you’re looking for money, and how much you’d like to raise. If the platform is based on rewards, make a list of what backers will receive. If you’re using an equity-based platform, you’ll need to specify the equity stake as well as the share price, if one can be calculated. The pitch phase can be time-consuming. It’s a full-fledged marketing campaign aimed at promoting your project or company and attracting investors. It may also necessitate frequent upgrades to maintain interest. To get the word out, your company should use social media channels to reach out to its customers and admirers. You’ll have to share your business and financial information with complete strangers if you run an equity crowdfunding campaign. If you’re an existing business, this contains current company information, financial statements and forecasts, a believable business plan, and a fair valuation.
- Campaign end
You get all of the donations raised during the campaign with some social crowdfunding platforms. Others require you to establish a goal and only receive money if you achieve it.
You’re given a deadline to recruit investors when you use equity crowdfunding. If you’re successful, the platform arranges for the funds to be paid to you and the investors to receive share certificates or convertible notes. You may be allowed to extend the deadline if you are unable to acquire investors. Costs – for example, a percentage of the amount raised plus transaction fees – are how these platforms make money. Some people take equity as well. Some won’t charge you anything unless you succeed. They handle a lot of the administration and, in the case of equity platforms, legal compliance, which can be difficult to handle on your own.
Chapter 7: Small business grants
What is a small business grant?
A grant is money that the government, a firm, or a philanthropist gives to your company. Grants are essentially unrestricted funds that you do not have to repay. Their goal is to provide assistance to small enterprises. They’re frequently used to create jobs, fund projects that traditional lenders won’t fund, and boost community economic advantages.
Grants are an excellent source of finance for some small enterprises. Applying for them can be a lot of work, but if you get free money in the end, it can be worth it.
How big are grants?
Grants can range in value from a few hundred dollars to hundreds of thousands of dollars. The majority, though, are under ten thousand dollars. As a result, they’re frequently used in conjunction with other sorts of small business financing.
How do you find them?
Grants can come from all levels of government, as well as philanthropists and businesses.
Here’s where you should look:
- Government websites – Government at both the national and municipal levels. They should keep track of their grants and provide links to other organisations such as non-profits, foundations, and companies. Visit the Australian government’s funding page for additional information.
- Small business and industry associations. They may have their own grants or information on grants that their members have successfully completed.
- Your accountant or bookkeeper. It’s possible that they have other clients who have been successful in obtaining funding.
Are there startup business grants?
There are startup grants available, but they won’t cover the entire cost of your firm. They could cover the price of hiring a specialist to help you build a company or financial strategy, as well as particular training and equipment purchases. They’re meant to help you get your foot on the ladder; the rest is up to you.
Research and development (R&D) grants are becoming increasingly plentiful, particularly for novel goods and processes. These funds can assist you in planning, developing, testing, and refining your concept. They may guide you through numerous stages, but you must finally raise the necessary finances to bring your concept to market.
What strings are attached with grants?
Grants can be targeted and have conditions attached to them. It’s possible that the money can only be spent on specified items or in specific locations. Consider the following scenario:
- before you may access the funds, you may be required to complete some form of orientation or training.
- they may impose a deadline, such as requiring you to complete your R&D within 12 months.
- it’s possible that you’ll need to put up an equal sum or combine it with more funds.
- if you utilised the money for R&D, for example, you may have to justify your actions or share the results.
How to apply for a small business grant
Although the money are unrestricted, you must demonstrate that you are deserving of them.
Don’t rush it
Prepare to devote a significant amount of time to the application. So, before you commit, learn what’s expected of you. Examine the timeline: how long will it take to apply and receive a response? Is it possible to wait that long, or would another source of finance be a better option?
Tailor your application
Make sure you understand why the grant was formed and what it’s for. Your application should demonstrate how your company meets the award’s objectives and how the funding will benefit your company – and make a larger difference if that is a goal.
Expect to submit details about yourself, your product or service, market demographics, and how you intend to use the award. This could include graphs, charts, and budgets. So that you may impress, you should be aware of your company’s strengths. The majority of the information you require should be included in your business plan.
Chapter 8: Pitching for business funding
Obtaining company capital is a big step, but it doesn’t have to be scary. Here’s how to explain your firm to lenders and investors so they can determine whether or not to take a chance on you.
What to demonstrate in your pitch
There are some fundamentals to learn whether you’re asking a bank for a loan or trying to persuade someone to invest in your company.
You want to sell the dream on the one hand. You must, however, show that you are rational and level-headed. It’s a delicate art of balance. Seek guidance from other business owners as well as an accountant or bookkeeper who prepares finance applications on a regular basis and knows what works.
1. Show you have a plan
A business strategy can be written in a variety of ways (we cover two in our guide on how to start a business). However, the most crucial points to convey to a financier are:
- the opportunity – describe the need you’re solving and estimate the market’s size.
- market analysis – present some research that proves the opportunity is really
- how you’ll resource the business – identify the skills you’ll need versus the skills you already have
- your business model – demonstrate how you’ll turn the opportunity into money
- financial forecasts and budgets – show when you’ll be profitable
It’s also crucial to discuss the long-term future and your role there. Are you planning to continue in business for a long time? Do you want to grow it and sell it, or do you want to grow it and sell it? There is no right or wrong answer, but investors and lenders will be interested in learning about your plans.
2. Share detailed financials
Show financiers, you’ve thought of everything – the good, the bad and the ugly:
- So they can see you’re properly prepared, your budget should be thorough and include allowances for unanticipated costs (contingencies).
- Make a detailed plan for how you intend to use the funds.
- Demonstrate your abilities on high-priced things. Is there a less expensive option, and if so, why didn’t you choose it?
- Don’t get too excited about your sales projections. Include both the best and worst-case scenarios in your budget, but aim towards the centre.
- Create a balance sheet if the company has assets (or owes money). Lenders and investors want to know how much value is already there and if you’ve invested your own money.
- Demonstrate how and when your company will be profitable.
- Give specifics on how much you plan to accept from the company as a salary or compensation, as well as whether you have another source of income on hand.
Demonstrate how they’ll profit from working with you. You must demonstrate to the funders what benefits they will receive:
- Show lenders how your repayments fit into your budget (don’t forget to include in interest).
- Indicate when dividends will be paid to investors (or an increased share price).
Buying a business? If the funds are for buying a business, then you should also provide:
- two years of profit and loss statements for the company
- contract of sale and purchase
- a guarantee of a company’s assured turnover over a set period of time is known as a turnover warranty.
- any trade restrictions that hinder the prior owner from competing or contacting customers for a certain length of time
Are you looking to expand your company? If the money are being used to help you expand your business, you should also include:
- profit and loss statements over the previous two years
- results from the same time period
- a description of how the cash will help the company become more profitable
3. Convince them you know your stuff
You must demonstrate that you are familiar with the industry you are entering. This should go without saying. However, you must also demonstrate to lenders and investors that you understand the financial aspects of your project. Knowing any (or all) of these figures off the top of your head is helpful:
- Revenue – the money you’ll generate from sales of your product or service over a specific period (usually a year)
- Costs, which come in two main varieties:
- Direct costs – costs that go up the more sales you make (includes things like inventory).
- Indirect costs – costs that stay the same no matter how busy you are (including rent and staff).
- Gross profit – the amount of money your business will make from sales after deducting the cost of goods or services sold (and before you pay operating expenses, payroll, tax and overheads)
- Net profit – the total amount of profit your business will make after deducting all costs (including direct fees, operating costs, payroll, tax and overheads)
- Margin – the difference between your product or service’s selling price and the cost of production
- Value of security – the value of the assets you’ll use to secure the lending
- Credit score – an external rating of how good you are at paying your bills and debts
- Repayments or payback on the finance you’re seeking – what repayments you’ll make and when, or what dividends you hope to pay out to investors and how much you’ll grow the value of the company and their shares.
4. Get them excited
Remember to demonstrate your goods or service to them! Show them a mockup if it hasn’t been developed yet. Create a video, take pictures, and display screenshots. Lenders and investors want to see solid evidence. Don’t rely solely on their imaginings.
When pitching a concept, show your enthusiasm for it, but don’t lose sight of reality. While it’s wonderful to be ecstatic about your company’s financial prospects, you must reassure your audience that you are aware of the risks and threats. It’ll be much better if you have plans in place to deal with them. Also, if there’s something you don’t know, tell them right away.