5 Common Funding Sources for Australian Businesses
Whether you need it to solve a temporary cash flow issue, buy new production equipment, or run a major promotional campaign, there comes a point where most Australian businesses require an injection of capital.
The damning statistic is that over 75% of small businesses fail within the first five years, often because of a shortage of funds.
So, therefore, to survive, it is crucial your business has access to money.
If you ever find yourself in a position where you need to raise capital urgently, there are a few ways you can do it.
In this guide we’ll outline for you what they are. So, if the sudden need hits you, at the very least, you will have a strategy at the ready.
Common funding sources for Australian businesses
Outlined below is an overview of the 5 most common funding sources for Australian businesses, particularly small businesses. If you ever need a fast injection of capital, these are the avenues you can explore.
1. Dip into your savings
For many small business owners, the act of investing, or introducing, your own money into the business, tends to happen at the early, start-up stage. Though it can occur when a company is trying to get to the next level.
Clearly this might not be right for every business, and you will need to be fully aware of why you require the extra capital before you borrow from yourself.
However, if you can keep costs to a minimum, and focus solely on generating more sales and widening your client base, this could be an astute option for you.
Not least because you will retain firm control and won’t have to give up a stake in your company.
2. Tap into family and friends
Many small business owners start their business with financial contributions from their parents, family, or friends.
Whether they are sold on your business idea, or they just want to see you succeed, this is arguably the easiest form of finance to get. Usually, because unlike professional investors, they are less inclined to want to see a business plan, or at least interrogate you as much on it, and demand detailed profit projections.
Before you accept any money from friends and family, be aware that there are risks involved in borrowing money from them. If the money is not repaid in a timely manner, it can cause a lot of friction, and even cause relationships to break down.
3. Bank loans
For most smaller businesses who need a fast injection of capital, bank loans are the traditional option of choice.
There are several business finance options available from banks and other financial lending institutions. With the most popular of them being as follows:
Business Loan
This is a specific amount of money which is lent to you. The term of the loan can vary from just a couple of months to 5 years, or more.
It can either have a fixed rate of interest, or one that varies according to inflation, with repayments happening at an agreed regular interval.
Loans can be secured, or unsecured. If they are secured, then usually an asset of some kind has been put up against it.
If they are unsecured, you won’t be able to borrow as much, and may have a higher rate of interest applied, than if it was secured.
Line of credit or business overdraft
A line of credit, or business overdraft is a very good option for those who need immediate access to money.
Once approved, it typically gets applied to your business bank account. The great thing about this option is that you only pay interest on what you use, as opposed to the whole overdraft amount.
While the interest rate for an overdraft is usually more than it is for a business loan. As and when funds come, you can regularly reduce the limit.
There is also no official ‘term’ for the overdraft. Basically, it only ends when your balance returns to the black.
Invoice finance
For those businesses that need to access money very quickly, invoice finance may well be a good solution for you.
Sometimes known as accounts receivable finance, this involves the lender giving you the money for outstanding invoices owed to you upfront.
You won’t receive all the money, usually about 80% to 85% of the total value owed to you. But once approved, you should usually be able to draw upon it within 24 hours.
Finance lease
A finance lease is another type of loan for small businesses.
It allows you to make use of a particular asset, such as manufacturing equipment or a car for a specified period.
The financial lending institution then purchases the asset on your behalf and rents it back to you, until such time as the specific period has elapsed. At which point you will need to return the asset.
Whilst you do not, at any time, own the asset, the payments you make might be tax deductible.
Commercial hire purchase
Commercial hire purchases differ slightly from a finance lease as it involves the financial institution actually buying the asset on your behalf.
Over an agreed period, you will be able to use it, so long as you make regular repayments. After they have all been made, you will then own the asset outright.
A nice little benefit of this option, is that the depreciation of the asset and the interest on the finance, may well be tax deductible.
Chattel mortgage
Predominantly used to purchase vehicles or equipment, a chattel mortgage is a popular type of business finance.
Sometimes called a ‘goods loan’, this option enables your business to own an asset right from the very beginning.
Over an agreed timeframe, you will need to make regular repayments, which will run until the loan’s full amount has been paid off.
However, like with a commercial hire purchase, the depreciation and interest may be tax deductible.
Government grants
For many small businesses, government grants are a lifeline when it comes to raising capital.
Offered by both the state and federal government, grants are available for start-up businesses, as well as to grow and expand businesses that have been trading for a while.
You’ll need to meet eligibility criteria, as well as provide plenty of supporting documentation when you do apply. But here is a full list of grants your business may be eligible for.
Other ways of raising capital
There are a few other ways of raising capital for your business. These include the following:
Crowdfunding
With the likes of Patreon, Fundly, Indiegogo, and Kickstarter gaining traction, an increasing number of businesses are turning to Crowdfunding as a source of funding.
Providing you with a platform to pitch your business idea, in the hope of receiving capital, it can be a solid option for start-ups. However, you might find it difficult to raise significant amounts of money.
As a result, you might want to consider it as part of a wider strategy that works in conjunction with other methods of generating capital. And not as the sole option you are employing.
Venture capital
Venture capital is another popular source of funding, particularly for start-ups.
Taking the form of a private equity investment into new businesses that demonstrate a high-growth potential, you can raise significant amounts of capital for your business this way.
You can also benefit from the business contacts and expertise these investors may bring in, to assist in the growth and subsequent expansion of an organisation.
One of the major drawbacks as a business owner is that venture capital firms will often demand a significant percentage of your company’s equity – sometimes even majority ownership – which you may not want to give up.
However, they would have a vested interest in your company succeeding. Which means they will take an active interest in ensuring it becomes successful.
Angel investors
Another way to raise capital for your business is through Angel investors.
Essentially, these are businesses and successful entrepreneurs that are wanting to give others a helping hand.
If they are struck by your business idea and believe they can help make it a success, they may well be willing to invest money into it – usually for an equity stake of up to 20%.
Although you will have to cede some aspect of control on your business, these angel investors will provide you with mentorship. Which could prove invaluable, as their advice, connections and experience could potentially save, or make you, a lot of money.
When the time and conditions are right, they will also be able to help you scale your company as well.
Final Thought
At the end of the day, you want to build a business you love and give it every chance to be successful.
The common funding sources showcased above are a great way to help you do just that.
Armed with a solid, well thought out business plan, excellent presentation skills and a winning attitude, if you ever find yourself trying to raise capital, you may just be pleasantly surprised at the level of cash injection you may receive.
