Funding Options for Your Growth Plan
Introduction and Overview
If you are really serious about growing your business–unless you are fortunate enough to have cash or liquid assets available to fund your business, you’ll have to embrace funding.
Funding, whether it’s debt or equity, always involves due diligence. So, the business books need to be watertight.
They’re going to want to know every single aspect of your business, because they need to confirm the value of your business.
Cash is the fuel for your business. Growth requires more cash.
Debt to equity ratio-Your company’s Gearing.
Before going into detail on the merits of debt funding vs. equity, it is important to be aware that debt lenders and equity investors will take into account what is known as your “Debt to equity ratio” also called “gearing” as it currently stands and what it would be after they provide cash either as a loan (debt) or equity (investment).
There is a section with an explanation of how it is calculated, and an example in the Financial Control Program.
What is Debt financing?
Debt financing is where you borrow money from a lender that will generally have a monthly repayment schedule comprised of both loan repayments and interest. Although interest only for the first few years or with a balloon payment on termination might be possible from some providers.
If you’ve ever taken out a loan from your bank, you’ve financed something with debt.
Pros of debt financing vs. equity
- With a business loan, you’re in control of how that extra capital gets spent. For the most part, what you’re using the loan for is up to you.
- The lender does not have a claim to equity in the business.
- A lender is entitled only to repayment of the principal of the loan plus interest and has no direct claim on future profits.
- Debt financing is flexible. There are many different kinds of loans with wide ranges in how much money you’ll get, interest rates & loan duration.
- Debt can be short term, with lines of credit that finance cash-flow swings, or long term, with loans of up to 10 years .
- Interest payments and bank fees on debt are tax-deductible.
- Taking on debt is cheaper than equity in the long run, after taking into account associated costs.
What is Equity financing?
Equity financing is where you trade a level of ownership of your business, in return for their capital investment.
Equity is especially important for certain industries and kinds of businesses, such as technology start-ups and companies with global aspirations.
Debt lenders are highly unlikely to lend large sums of money to start-up companies with no proven track record, and an IPO (Initial Public offering or float) for a new start-up is equally unlikely to be an option.
Pros of Equity vs. Debt financing
- You don’t have to pay interest on the capital you raise,
- With the right investors, you can also get great experience, industry connections & much more.
- The investors assume nearly all the risk.
How do you know which is right for you?
If you’re having trouble deciding between debt and equity financing, here are five questions to ask yourself:
- How soon do you need financing?
If you need cash as soon as possible, then debt financing is your best option
2. How much capital do you need?
If you’re only looking for a small amount, debt financing is the better choice.
3. Are you looking for more than just money?
If so, equity is probably for you. You will get access to an investor’s knowledge, expertise, & contacts.
- Do you mind sharing your business?
Many entrepreneurs prefer to keep control of their businesses , in that case equity financing isn’t the way to go.
- How big do you want to get?
Investors and venture capital companies often look for companies with the potential to grow into national brands or global businesses. If that’s your goal, then equity can help you get there.
The new and alternative ways you can get funding include:
1. Angel investors These wealthy individuals provide capital in return for equity or convertible debt. You often get a lot more one-to-one support and personal mentoring than with VCs, especially if they made their money in a similar field to yours. Many Angel Investors will supply smaller amounts than Venture capital and Private Equity Funds who are unlikely to entertain small investments (under $300,000)
It’s common for angel investors to support local initiatives, so if your business has a particular local angle then it could certainly be an avenue worth exploring.
2. Incorporate your business (i.e. form a company and offer shares in stock to a select group of people without offering shares to the public through an IPO or float) and invite private individuals, such as business acquaintances, friends and family to invest in your business. You will need to put together a legal agreement to make sure everyone knows what to expect.
3. Public Investors. When a company gets larger and wants to grow more, the typical way is to get people to buy shares of shares in the business. If the company wants to go public, it can arrange to have an initial public offering (IPO) of shares.
This process takes a lot of time and money because you will have to hire lots of people to help and the due-diligence process is long and complex, because due-diligence will be the basis for the “Prospectus” for an IPO.
This is the document provided to potential investors and upon which they rely when deciding whether to invest in your company and the directors are required to sign-off on.
So, if things don’t go according to the Financial Projections in the prospectus, directors are at risk of being charged with providing false or misleading information, which, worst case, could see them receiving a jail sentence and heavy fines. Most small businesses don’t go public until they are very large and successful.
4. Peer-to-peer lending Peer-to-peer lending (P2P) platforms match SMEs directly with individuals or organisations who are willing to lend money. Loans tend to be quick and made up of many small investments, which is why investors find it so appealing (they can spread the risk). P2P is a model well worth considering if speed is a major factor for you.
5. Crowdfunding Instead of asking a few people for large sums of money, with crowdfunding you are asking thousands of people for small sums of money. Entrepreneurs pitch their ideas online to the community, set a target and see if the funds come back in. It’s possible to raise huge amounts in a short space of time. It can even help get your business plenty of exposure and a wealth of useful feedback.
6. Cash advances Unlike banks, advances are based on a fixed fee, not interest rates. These lenders will provide short-term financing typically 3 to 24 months and from $5000 to $300,000 with a fixed fee agreed in advance.
7. Grants and tax breaks Thousands of SMEs are missing out on funds by not realising they are eligible for tax breaks or government grants. The Australian government is actively looking to support businesses that are making valuable research and development contributions to the economy.
In Conclusion
If you believe that the “Funding Options for Your Growth Program” might be helpful for you, to get a complete understanding of the options available and how to maximise your chances of securing the funding you need for your growth plan,
you can book a free 20-30 minute discovery call with me personally, so we can explore whether it is a good fit for you and your business at this time.
Click on the button below to book an appointment in my calendar:
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Or alternatively, message me in LinkedIn, or just send me a text message with heading “Business Growth Plan”, and your first name, and I will call you back within 24 hours to arrange a time for an initial chat.
My mobile number in Australia is 0418 277 137.
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I look forward to talking with you.