Seeking finance and funding
All of your business activity – marketing, sales, production, administration, and planning – is dependent on your available finance.
The first step is to determine your financial requirements which generally fall into two categories – fixed or permanent investment capital, and working capital.
Fixed or permanent investment capital is used to fund fixed assets such as land, buildings, plant, machinery, vehicles, fixtures and fittings. Assessing your requirements under this category involves:
- identifying all required items
- determining when they will be required
- totalling the cost of each item.
Working capital refers to the money you need to run the normal, day-to-day operations of your business.
Once you know your financial requirements, it's time to seek funding. You have several options:
- loans from a bank or other type of financial institution
- using your personal savings or properties
- borrowing money from friends and relatives
- venture capital.
The Australian Government administers a national Personal Property Securities (PPS) Register to improve the ability of individuals and businesses to use their property as security to raise capital. Personal property is any form of property other than land, buildings or fixtures. It can include tangibles such as cars, art, machinery and crops. It can also include intangibles such as intellectual property and contract rights. The register helps you manage credit risk, check for debt owing on goods planned for purchase, and search and register security interests in personal property.
Types of finance
If you decide to raise capital by borrowing money you need to consider what type of finance will suit your needs. It's important to match the nature and terms of the loan to its purpose. Some of the options available include:
- Overdraft - for short-term working capital needs or seasonal requirements.
- Commercial bills of exchange – for short-term, including seasonal, requirements, bridging purposes and working capital needs.
- Leasing finance – for lease of plant, equipment and motor vehicles.
- Hire purchase and asset purchase finance – for acquisition of plant, equipment and motor vehicles.
- Term loans – for purchase of land, buildings, plant and equipment, or to assist with set-up costs.
- Personal installment loans – for purchase of motor vehicles, equipment and any other worthwhile purpose.
- Shareholders' equity finance - extra capital provided by you, the owner; or investors into the business, often in exchange for some control or input of the business.
- Venture capitalists - they typically take on very specific, limited range of investment, often large amounts of funding used for unique, high growth businesses destined for floatation on the stock market.
- Angel investors – they are more likely to consider investing in a broader range of businesses, including lower-risk businesses that are still in the early stages of potential. Business angels will often expect to make their own skills, experience and contacts available to the company.
- Crowd funding - some social media websites offer entrepreneurs a 'crowd funding' platform for their product prototypes or innovative projects. It involves setting a funding goal, providing project and budget details and inviting people to contribute to a startup capital pool.
A realistic and manageable business plan will be of great assistance when you approach possible sources of finance. Whether it's your family or a bank manager, any potential investor will want to see that you have well-planned and achievable strategies that will make your business a success.