It’s vital the primary financial controller of the business takes a commercial approach to the different funding options available and how each will lead to improvement in the business performance.
With the Federal Government currently promoting innovation and risk-taking in Australia through support and generous tax concessions, it’s now more attractive to invest in Early Stage Innovation Companies (ESICs) and to obtain capital funding. Whether it’s a new business or an existing sustainable business, what funding options do you look at to continue to grow and expand your business?
Generally, SMEs seek funding through two sources, capital contribution from owners and debt financing with a corporate lending institution. SMEs tend to provide the last set of financial statements to their banker and hope for the best. Lenders will evaluate the business to determine the ability to repay debt. The healthier the business looks, the more the funding options available, and usually at better rates.
How can you avoid the pitfalls of seeking finance?
One of the key steps that businesses fail to consider prior to seeking funding is reviewing their credit profile. Whether you are seeking financing through debt or equity, here are a few key areas that will better your credit profile for lenders or potential investors:
- Prepare an Information Memorandum (business plan). Outline the key information that investors will be seeking, such as:
- growth plan and forecasting
- identified opportunities within your business
- clear breakdown of how the money will be spent
- valuation of the business
- core drivers of the business
- ability to repay debts or return on capital
- strategic value and key assets
- outline of key stakeholders within the business.
- Identify the amount of funding required to uplift the business through the growth stage. This ensures profits are not diluted through debt repayments or capital return.
- Seek professional advice and assistance from tax and legal advisers.
Linking with the right investor may be valuable as you may be able to leverage off their experience and networks. Look for opportunities where the investors can add more value to your business. Consider whether you are able to leverage off their experience and networks (this is known as ‘smart money’).
You are the heart and soul of the business, and as much as you would like to work with a particular investor, they would need to want to work with you, too. Potential investors will not only be looking at the business opportunity but who they will be partnering with.
What other financing is available?
Besides larger scale debt and equity financing, your business may require short-term capital. For example, where you need additional funds to satisfy short-term cashflow requirements. This type of funding generally doesn’t require the same level of detail as above. Partner with an advisor who can help you to analyse your situation to determine what funding would best suit the circumstances.
Capital for cashflow management could take the form of one or more of these arrangements:
- Debt factoring – selling outstanding invoices to third parties at a discount to help with cash flow management.
- Trade financing – with international trading getting easier, there are still some risks involved such as currency fluctuations and non-payment for goods or services. To protect against these risks is to issue a letter of credit, i.e. the exporter is guaranteed payment by the bank upon receipt of confirmation the goods have been shipped or services provided.
- Inventory financing – loan or a line of credit to assist the purchase of inventory which then serves as collateral should the business be unable to sell the products or repay the loan. This can help cash flow during seasonal fluctuations and/or slow moving inventory.
- Credit-card stacking – using credit cards to finance purchases of supplies or equipment. As credit cards tend to have higher rates, planning is required to ensure consideration for: 1) minimum amount required, 2) ability to repay debt, and 3) timing of repayment (considering the rate of interest).
- Reward crowdfunding – A way to raise capital (as well as increase your customer base) through products, gift cards and rewards.
It’s vital the primary financial controller of the business takes a commercial approach to the different funding options available and how each will lead to improvement in the business performance and ultimately meets the requirements of the business and its investors.
Tony Nguyen, Manager – Business Services & Tax, Prosperity Advisers
