If you have ever had a business idea or already have a business but struggling to get off the ground, then you are probably struggling with the same hurdle that plagues 85% of the small businesses and the reason why a lot of great ideas and businesses never see the daylight.
Yep, I am sure you have heard of that word (or lack of it):
Although, it is comforting to know that just about every large business that exists today was once small and was probably in a similar boat to you, desperately searching for the much needed capital to grow. For a number of people, credit cards and savings are the only source of funds at the start as they simply do not qualify for stringent lending criteria often associated with securing traditional business loans.
In this post I will try to explore some old (but not often explored), some new and also some lesser known and innovative ways to raise finance for your next business idea or to help grow your small business.
Quick Disclaimer: Although most of the methods discussed here apply to financial conditions in Australia. The broad concept can be applied to any country or region with a western style lending system.
Let’s start with what is really the foundation of any good business no matter how big or small and often ignored by many small business owners until things get out of hand and panic sets in.
Keeping good financial records
In some western countries (including Australia), traditional bank business lending required businesses to have at least two years worth of tax returns and financial records even before their application for loans can be considered. While this is not necessary for all the methods we will be discussing here, it is absolutely important that you stay on top of your financial records right from the start as this is likely to boost your chances of successfully securing funding.
Open a business bank account and keep track of all your business related transactions all from one place including accepting payments and making payments. If you intend on paying yourself a salary, make sure that you treat it as a dedicated salary transaction (also paying tax withholding if applicable). Simply paying for your personal expenses using the business funds (as some small business owners tend to do) is nothing more than stealing money from your small business.
I would also recommend investing in a professional bookkeeper to keep track of your financials once you get to a certain size or turnover where it is practical to do so. You can also look at self managed accounting solutions like Outright.com at the start to manage all your financial records. Outright offers an extremely easy to use interface with a simple three step setup.
Tracking your financials may all seem boring and daunting at the start but trust me you will be kicking yourself for not doing so if an opportunity comes knocking on your door.
Let’s now look into some of the proven ways you can find much needed capital to grow or kickstart your small business.
In recent years, crowdfunding has emerged as one of the truly innovative ways of capital raising. A concept where everyday people just like you and me (or the crowd) pitch in a little bit to raise money for a personal or business project.
Entrepreneurs and business owners post a project on a crowdfunding site visible to a large pool of people or “investors” who will then donate money if interested in the project. There are typically no fees involved for posting a project but you may be charged a fee for successfully securing funding.
Kickstarter.com was the market leader for this type of funding but a number of other crowdsourcing sites have also propped up in recent years.
Some popular crowdfunding sites include:
Seed Venture Capital
Many startups often make the mistake of considering seed venture off limits and simply do not try with a misguided assumption that they will not get it. Venture capital works very much like a business loan except the funding comes from a private investor and there are no “repayments” involved. You simply acquire funding in exchange for a stake in your company.
It is uncommon for large venture capital firms to provide seed investment at a startup stage due to financial risks unless they can see a unique opportunity. A slightly different breed of investors called “Angel investors” often invest in startup companies based potential and a projected valuation typically in the 5-10 year timeframe and often seeking return on their investment through a significantly larger acquisition or buyout.
Angel investors often comprise of individuals with high net worth seeking a large return on their investment
Many startups often use angel investment as a stepping stone to a larger venture capital style funding within a 2-3 year timeframe.
In Australia, Sydney Angels offer seed investment for startups or early stage companies through a member network of angel investors and private investors. Sydney angels accept 6 rounds of funding applications every year which allows entrepreneurs to pre screen and present pitches to a panel of angel investors.
Application details can be accessed on this page.
In addition, Australian Investment Network also offers entrepreneurs and startups to submit a “job board” style investment listing for their company for potential angel investors to look at.
MH Carnegie & Co headed by well known Australian financier and entrepreneur Mark Carnegie also offers access to large scale investments through its network of private and wholesale investors. If you happen to live in Sydney, they also offer an opportunity for a “walk in” elevator pitch at their underwood street business complex in Paddington, Sydney.
Finding angel or venture capital is a challenging task and is quite often not suitable for all types of businesses or startups remembering that a company must demonstrate a very high growth potential to attract interest from smaller investors at an early stage.
If you considering raising capital through this avenue, then I highly recommend investing in “A Guide to raising angel and venture capital” eBook by Dr Tom McKaskill available on the Anthill website.
As discussed earlier, a number of banks may be reluctant to lend unsecured finance to small business at the start. Personal loans on the contrary can be an easier and faster option for small business owners even if you can demonstrate a relatively small paycheck every month. Personal loans in most cases are unsecured (physical assets not required), free of expensive fees and charges normally associated with traditional bank loans and money is normally available for use within 3-5 business days.
Personal loans can be a great alternative if you are looking to top up much needed working capital to cover your business expenses or purchase inventory. Personal loans typically range from $3000 to $30,000 depending on your financial situation.
Citibank in Australia offers a great product called “ready credit” which allows individuals to borrow upto $30,000 for any use, a relatively straightforward approval process and low income threshold.
More information on this product is available on the Citibank website.
National Australia Bank also offers a lesser known product for small business owners called the Micro enterprise loan which is an unsecured business loan and allows you to borrow upto $20,000 in funding with a low fixed interest rate option. To qualify for this type of loan, you will need an application form, a solid business plan and some basic financials or cash flow projections if your business has been operating for under a year.
More information on this product is available here.
Business cash advance
Last on my list of lesser known avenues to small business finance is a business cash advance available through a range of private lenders. This is normally an expensive option for many small businesses as the repayment terms are extremely stringent (typically 6-7 months) with a heavy residual payment amount added to the actual borrowed funds (no interest is charged). The major benefits are:
- Extremely fast approval process
- Security assets are usually not required
This type of funding can be ideal if you already have a business with a solid cashflow and simply need funds to top up inventory or purchase equipment. For eg of you borrow $10,000, you can typically expect to pay it back in 6-7 months with a $1500 – $2000 residual fees incorporated into your weekly repayments.
Kabbage offers one such product dedicated to US and UK based ecommerce sellers. It works like a business cash advance with fixed monthly repayments and a fee added to the overall loan amount. This can be linked to your Paypal or online payment processing facility and repayments automatically deducted every month.
In Australia, private lenders such as Lendya, Business Fuel and Ausvance offer extremely competitive products with a simple application process ideal for businesses with strong and regular monthly cashflow. Business are normally able to borrow as much as their monthly turnover.
Finding capital is one of the toughest challenges any entrepreneur can face in their pursuit to building a thriving business but as you can see, there are a number of options at your disposal which just a few years ago would have been limited to bank loans.
Are you a small business owner? How did you go about finding growth capital for your business? Please share your story below.