5 key ways to fund your business

Do you have the funding you need for your business to reach its potential? Most owners don’t. SMEs are a significant contributor to Australia’s economy. We’re proudly home to over two million SMEs, across diverse industries, employing more than seven million Australians. NSW Business Chamber research found that failure to access adequate finance is a material concern for SMEs, with over 30 per cent of SMEs reporting they had missed an opportunity due to a lack of credit.^[1] Deloitte Access Economics estimates that about 10 per cent of Australian SMEs, or around 200,000 businesses, have problems accessing finance.^[2] The Chamber’s research on SMEs rejected for a loan found that many felt that the rejection significantly.   [caption id="" align="alignnone" width="690"] Your business needs funds to launch, hire team members, provide products or services, grow and reach its potential.[/caption]

Top 5 funding options

To help your business reach its full potential, there are five funding options, including:

1.  Loans

A loan can be secured against a business asset such as equipment, or a personal asset such as a house. A loan provides finance without issuing equity and giving up some control. Disadvantages include that secured loans are only available to businesses or owners with assets to secure, and the secured assets are at risk if the loan is not repaid.

An unsecured loan means the lender has no security. Common examples are an overdraft, credit card debt, or new products like NAB’s recently introduced quick-approval unsecured business loans up to $50,000. The key downsides are these only provide limited funds, have high interest rates, and are short-term solutions.

2.  Grants

Grants are available across a range of industries to help SMEs launch and grow your business. Grants are not a loan, the business is not in debt, there are no interest payments, and the grant does not have to be repaid. However, grants are seen as quite difficult to win due to high competition.

3.  Equity capital raising

Equity capital raising means issuing shares in your company to investors who become shareholders. Key benefits include a relationship with third parties who support your business, and no principal and interest repayments, so revenue can be retained to grow the business. A key issue to consider is that shareholders own shares in your company and have some oversight and control.

4.  Crowdfunding

Crowdfunding is obtaining contributions of money from the public, usually in exchange for a product or service that may not yet have launched. The funder buys an item, such as a novel product, in advance, on the basis that the funder will receive the item once the business finalises the product or service. Crowdfunding can give you exposure, new customers, and funds to grow your business. It is important to manage the crowdfunders’ expectations around timing of the new product or service.

5.  Convertible note

A convertible note is a promissory note, issued to investors, who provide capital, and in return will be issued with an agreed number of shares once a trigger event occurs. A common trigger is when your business raises a certain amount of funds. The convertible note holder receives an agreed amount of shares at a discounted rate.

Your business needs funds to launch, hire team members, provide products or services, grow and reach its potential. The right source of funds for your SME depends on your business goals and time-frames. If you seek funding, you need to consider what you are willing to give (e.g. security over assets, or issuing of shares) to receive the funds.

Excerpt reproduced with permission from Real Time Minds. ^[1] NSW Business Chamber Report, Small Business Access to Finance, November 2013 ^[2] Deloitte Access Economics, November 2013