Ready Set Grow A Guide To Funding Business Growth
28-Mar-2019 By - ewmaccountantsadmin

Almost every small business struggles through ups and downs on their journey to funding business growth.
Almost every small business struggles through ups and downs on their journey to funding business growth.

Securing funding for a new business can be a lengthy and frustrating process. While highly sought-after ventures may get financed within a matter of months, the average Australian business can wait up to a year and a half before reaching and receiving their funding goals. To shorten wait time and high-interest rates, entrepreneurs often first turn to savings, friends and family for funding, but since those sources are usually scarce, entrepreneurs must eventually look to outside help.

Unfortunately, the federal, state and territory governments in Australia don’t offer grants to start a business, only to expand, develop and export. New businesses are then forced to turn to financial institutions or outside investors. However, much like the media has widely reported, funds for start-up and growing businesses are dwindling due to the tight conditions of credit markets in the country. Lenders aren’t as quick to hand out loans and will ask for cash flow guarantees and collateral, stipulations that are hard for start-up companies to pull together and ensure.

Ever wondered how you can get funding to help your growing business? Here are seven business funding options you may not have considered.

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Take on new projects

If you have the opportunity to take on a new contract, it’s exciting news for your business, because new work means more customers, and eventually, increased revenue. Some new projects are a stepping stone for growth, whereas others will be make-or-break for your company. Either way, you might want to use finance to make things a bit more manageable.

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Winning new contracts is a good sign for the quality of your service but may seem like a big challenge. Many firms choose to use finance to boost their working capital, and going down this route means you’ll be able to buy new materials or equipment or even hire more employees.

With many alternative lenders, you’ll get the funds very quickly — in days, if not hours — so you can take advantage of new opportunities safe in the knowledge you’ve got the cash you need to see it through.

New equipment or machinery to boost growth

Updated equipment or machinery can help you work (or produce) more efficiently. There are many types of asset finance that can help you acquire new machinery or equipment — whether you need a new van, a more efficient excavator, or updated computer systems.

Whatever equipment you need, using asset finance is a simple way to kick off growth. Simply put, you can get new assets but still maintain healthy cash flow because you can use the assets without having to pay a huge amount of money upfront.

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Pursue new markets or expand into new offices

New markets mean new customers and potentially greater traction for your product or service. However, every small business has limited resources, and additional funds may be a useful or even necessary option to realise your international plans.

Many firms use trade finance in this situation, which is designed for paying suppliers. It’s based on purchase orders, so if you’ve taken on a big new customer you may be able to raise finance even if you haven’t been trading long. In fact, one of our recent customers MyGatorWatch did exactly that, with only 6 months of trading history.

The same applies to domestic expansion. If you’re getting lots of new contracts, ordering more stock, and hiring more staff, you’ll naturally think about expanding to another location — but it’s difficult to do so if your working capital isn’t keeping up. An all-purpose business loan could be helpful here, so you know you’ve got some extra cash to cover the short-term costs while your revenues catch up.

Embrace new types of growth funding

When you’re looking at using finance to grow your business, it’s important to keep an open mind. The business finance market has changed drastically in the last decade, and innovative business finance options like crowdfunding and peer-to-peer lending can be a smart way to give yourself some financial tailwind.

There are lots of platforms that allow businesses to get equity investment or a business loan from ‘the crowd’, but it’s important to bear in mind that if you choose to go down this route, your business needs be attractive to potential investors or lenders. For this reason, it’s not suitable for every growing business, but it can be a worthwhile option to explore.

Equally, there are lots of new options for ambitious business owners looking to take over existing firms. Raising finance for mergers, acquisitions, and management buy-ins and buyouts is complex, and can be structured in many ways, but there are lots of lenders in the market who could help. If you’re planning your next move for business growth, it’s a good idea to start thinking about your funding options early.

Government grants

If you are eligible, government grants can be great business funding options with minimal risk. However, typically the application can be lengthy and complicated.

If you are interested in pursuing government grants, websites such as Australiangovernmentgrants.org can help make it easier. EWM Accountants can also help you to assess your eligibility for various grants and tax offsets.

Small business loan

There is a common perception that securing a small business loan can be difficult. To be fair this is often true, particularly in your early days or if you don’t have a line of credit against your house. However, there are ways to increase your appeal to the banks. Most importantly you need a solid business plan, profitability projections and some of your own money on the table.

Using your accountant to approach the bank can be beneficial. If you can convince the bank that (together with your accountant) you have your finger on the pulse of your business then you’re a long way there.

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Debtor financing or funding

Traditionally thought of as a lender of last resort, debtor finance companies should not be overlooked as business funding options for growing businesses.

Provided the business is profitable, debtor finance allows you to borrow against the debtor book. There are a few drawbacks associated with using debtor funding, however when managed correctly these can be overcome and I have certainly seen debtor funding used to beneficial effect by business owners who had little or no ‘bricks and mortar’ security.

Some debtor funding companies will require the arrangement to be disclosed to the customer and outstanding debts are handled by the debtor finance company.

This needs to be handled with care and communicated as a good news story (i.e. ‘the business is growing and needs cash to fund that growth’ and ‘the business has outsourced its debtor management function thereby enabling the owner to focus on business growth’).

Debtor finance is also generally more expensive because of the inherent risk but if it’s your only source of funding and if you’re making a return on capital from your business that is greater than the cost of the debtor finance, then it is worth doing.

Using your debtor book to fund your growth makes sense. As your business grows, you can borrow more to fund that growth. However, this form of funding is not perfect, so speak to your accountant or business adviser before heading down this path.

Negotiating an advance from a strategic partner or customer

If you can find a major customer, or a complimentary business, who sees immense value in your idea you may be able to negotiate for them to fund the growth of your business.

Angel investors

Angel investors offer another business funding option for your business. There are a number of angel investor groups in most cities and a number of angel investors who operate outside of a business angel network.

Venture capital

If you are a well-established company looking to raise a serious amount of capital, venture capital firms may be an appealing option. Because of the size of funding provided by venture capital firms, and the high-risk nature of the loan, venture capital funding comes with a number of cons. Generally, VC partners will want to be involved at the board level. Sometimes they may also require more than a 50% stake in your company, which means you could lose management control. Ultimately the decision to pursue venture capital should depend on whether it will open up much greater opportunities. In other words, are you better off with 50% of something or 100% of nothing?

Conclusion

Running a business is tough work, and there are many challenges you have to get through — from setup to survival, to growth. But, if you prepare your strategy early on, alternative finance can help you approach the next step and move your business forward whether you’re expanding internationally, or getting a second van.

Float allows you to see the reality of the cash flow in and out of your business. By monitoring your cash flow through Float you can be one step ahead when applying for funding – you’ll know if, and when, you’ll need to.

About the Author
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions

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