Sources of finance – here’s your options
Finance writer and commentator Farnoosh Torabi once wrote: “You don’t get what you deserve, you get what you negotiate.”It’s worth bearing this mantra in mind when figuring out the best way to fund your business. Securing finance can be frustrating.
The Australian Innovation System Report 2015 found access to funding was the greatest barrier to innovation facing all SMEs under four years old.
You’ve worked hard at preparing your business plan and getting your financial documents in order. You know how much you need and the type of investment you want.
Now, what type of people should you approach?
We all want an angel, even better if that is your investor! But perhaps there’s someone else you can pitch to.
The first decision to make is whether you will go with debt or equity finance. Run through all your options thoroughly and commit to your chosen course.
Sources of debt funding
- Banks, credit unions and building societies: Finance can be provided in the form of loans, lines of credit and overdraft facilities. Try sites such as Infochoiceto compare a range of products.
- Factoring or invoice discounting: This (usually more expensive loan) allows business to borrow against outstanding invoices. It is particularly useful for industries with long payment terms that need cash flow to grow.
- Peer-to-peer lenders: This is an expanding market, with RateSettergranted a licence to operate a marketplace model that matches retail investors with businesses seeking loans. It plans to focus on secured loans. Others, such as Prospa, Moula, OnDeck and Spotcap, lend off their own balance sheets.
- Family or friends: Preferably, have the same paperwork as you would for a professional agreement with any organisation.
Sources of equity funding
- Business Angels (private investors): Wealthy individuals willing to invest significant sums in return for equity and profit share. Angel organisations have become much more active and formalised in recent years. Consider carefully how much control you want to cede in return for cash. InWA, there’s a group called Perth Angels and there’s also Innovation Bay (a local network for software developers) that will let you pitch to potential investors.
- Crowdfunding: The “it girl” of equity funding. The crowdfunding theory is that large amounts of people give relatively small amounts of cash to help businesses reach establishment targets. Australia’s major crowdfunding platforms report around 50 per cent success rates in campaigns reaching their targets. Pledges may be solicited in return for tangible or intangible rewards, such as invitations to openings or free products or services. It is suited to novel ideas, or arts and music projects that have a “feel-good” reward for investors.
- Equity Crowd Funding:This source of capital has become available since 2017 but remains not very well tested in WA.
- Venture capital funds: Usually later-stage investors, these professional investors look for operating companies with high growth potential. There are virtually no active venture capital funds in Perth, but Matt Macfarlane of m15e ventures says there are several operating on the east coast of Australia, who might consider investing in Perth. These funds typically seek substantial returns from investments and your business will need to address a very large market.Macfarlane describes these funds as often having an expectation of “blue sky upside potential” which can be well beyond a company’s forecast. Venture investors expect a substantial level of traction with customer engagement, customer revenues and early take-up of your product.
- Government grants: The federal Department of Industry, Innovation and Science has a grant finder toolfor businesses. The Australian Competition and Consumer Commission has warned SMEs about a number of scam websites that appear to offer access to government grants for a fee. Grant applications are free.
- Family and friends: They may invest in return for equity.
- Suppliers and customers:Worth considering as sometimes these can become quite useful as strategic investors.
- High net worth and family offices: Funds obtained from wealthy people and the family offices they run.