When considering how you’re going to raise capital, you should consider how much money you’ll need, and your business plans.
You should speak to your business advisor, accountant or bank about the type of financing that suits your business and its current stage of operation.
Bootstrapping involves financing your business without raising equity from traditional sources (getting investors, partners or selling shares in the business) or borrowing money from a bank.
If you’re resource poor, it doesn’t necessarily have to limit the growth of your idea. For most entrepreneurs, this means bootstrapping, as in 'to pull oneself up by one's bootstraps' - you beg, borrow or lease to start the new venture.
Some examples of bootstrapping include:
- running the business from home, instead of leasing office space
- paying employees with company shares in lieu of salary
- obtaining loans from family and friends
- using home equity loans
- leasing equipment or premises rather than buying
- buying on consignment from suppliers
- using government grants to subsidise your early-stage research and prototyping, business planning and marketing efforts.
Bootstrapping is a must for many small businesses. It may be complemented by spending money in the right places and at the right time; the business owner must protect their initial cash resources as much as possible.
Debt finance is borrowing money that you pay back with interest, such as bank loans, overdrafts, mortgages, credit cards and equipment leases.
Debt financing will allow you to:
- maintain ownership
- claim tax deductions on the interest, fees and charges
- keep the profits, beyond the loan and interest repayments.
However, you should also consider:
- banks can be conservative about lending money, especially to new businesses
- you’ll need to generate enough cash to repay the loan and interest on time
- your credit rating will depend on you meeting your loan conditions.
Equity finance is where your own or other stakeholders’ funds are invested into your business in exchange for partial ownership.
Equity finance can be obtained from your family and friends, a ‘business angel’, venture capitalists or selling shares in your company, either privately or publicly.
Each of these options means that you’re sharing the ownership of your business with another individual or entity, which means sharing the profits, too.
You should consider:
- the possible impact (good and bad) of involving family or friends in your business
- the time and resources required to approach external investors and ‘pitch’ your business to them
- whether you want to share ownership and management of your business with other parties.
Crowdfunding is a relatively new way to access finance.
It relies on people donating money and sharing networks and resources to support a project in return for incentives or rewards such as merchandise, products, or recognition.
Crowdfunding is suitable for businesses that can attract followers who share the same values or interests in new technology, products, or sustainable practices.
If you’re interested in crowdfunding, you should explore reputable websites where you can post information about your business and why you want to develop your new idea. Where possible, you may wish to register your intellectual property to protect your ideas before you take this step.
There are no guarantees that you’ll attract the funding you need, or receive them within a certain time frame, so if your expansion requires financial backing within a given period you may wish to consider another form of finance.
Whether you’re a large or small business, you can search for assistance from all levels of government in Australia.
Government grant information is available for free online!
Businesses will never be asked to pay money to access government grant information – be wary of any websites that charge fees for grant-related services.
The South Australian Government and Australian Government provide a range of funding and support services to help improve or expand your business.
You can search for grants, funding and support programs from across government that may be available for your business using the Australian Government Grants and Programs finder.