Owners and founders of growing businesses often know what that crucial piece of equipment is or when the next key hire is required, to execute their killer growth strategy. The amount of money in the bank account is the only thing holding them back. If you’re thinking big and want to accelerate your growth, but finance is the issue, here are some options to explore.
Wondering How To Fund Your Small Business Growth? Ask These Questions First
There are many different options to fund a small business. Asking the below questions will help you understand the best options for your business.
- Does my business need cash flow to facilitate ongoing working capital requirements?
- Do I need money to expand my operations or capabilities within the business?
- Aside from money, could my business benefit from industry expertise or specialist knowledge in a certain area?
- Will my business survive if I don’t secure additional funding?
Now that you’re clear on what you need funding for, let’s explore some options. We’ve broken them down into two distinct categories; non-dilutive funding and funding that dilutes your equity. Let’s start with non-dilutive funding options, something most young businesses should strive to access.
Non-dilutive Funding Options
Non-dilutive funding allows you to get money to grow without giving away ownership or diluting your equity in the business. This can include a good old bank loan, but in today’s digital world that celebrates startups, where fintech products abound and governments look to support local innovation; grants, invoice financing and crowdfunding are legitimate non-dilutive funding options for small businesses.
Grants
Grants can be provided by both private and public sector enterprises. Government grants can be issued by local, state and federal governments, so check with the business bodies at each of these levels. Grants are often targeted at certain industries, demographics, startups or growth stage businesses, or a combination of these factors. Here are some pro’s and con’s of grant funding as a non-dilutive funding option for small businesses.
Benefits of grants:
- You don’t give away equity in your business in exchange for funds
- Grants can range from a few thousand to millions of dollars
- Grants don’t require you to pay back money or pay interest or dividends
Drawbacks of grants:
- Grants may come with strict criteria on what the funds can be used for
- Some grant application processes can be complex and time consuming
- Grants compliance may require additional administrative time and energy
The world of grants can be difficult to navigate alone. Our experienced grants consultants guide you through these generous opportunities to maximise the benefits, without sinking into the abyss of eligibility, applications and compliance. Reach out to our BlueRock Grants and Incentives team if you want to explore grant funding for your small business.
Invoice and Debtor Financing Options
“Do invoice due dates mean nothing to people!?” It’s an age-old problem faced by many business owners. Startup founders often get a rude shock when they first get into business and learn that invoices are often not paid on time and seemingly, whenever clients or debtors feel like it! If you’re making a lot of sales but it’s taking a long time to collect payment, then invoice and debtor financing could be right for you. Invoice finance for small business allows you to sell your receivables to a financial institution at a discount and you receive money when the facility is approved. In some cases, the institution then assumes the debt and is responsible for its collection. Alternatively, they’ll advance the funds to your business and hold the invoice as security.
Benefits of Invoice and Debtor Finance:
- Invoice financing frees up cash flow and gets you money needed for working capital
- It also transfers the administration of chasing debtors to the facility provider.
Drawbacks of Invoice and Debtor Finance:
- Fees are involved and can be expensive
- Financial institutions may have strict criteria for the receivables they’re willing to purchase.
Crowdfunding Platforms
Crowdfunding, which is different from crowdsourced funding, is used to fund money from a large group of people in exchange for a product or service. It’s a popular strategy when a product is still in development or beta, and you can offer early adopters first access to the product or service. Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. Financial pledges can be made and collected, usually with a fee charged by the crowdfunding platforms if the fundraising campaign has been successful.
Benefits of Crowdfunding Platforms:
- Crowdfunding lets businesses fund large once-off projects without diluting equity
- Crowdfunding allows startups to validate their product uptake in the market.
Drawbacks of Crowdfunding Platforms:
- Success is not guaranteed as you require public buy-in to get funds
- You risk reputation damage if you cannot deliver the product or service.
Funding That Involves Equity Dilution
You might not like the idea of giving away slices of your equity in your business, but there are benefits to this type of startup and small business funding. It could also be the only option to secure enough funding to get where you want to be.
There are many paths you can take when seeking investment in your business. Crowd-sourced funding initiatives are facilitated by government policy. Sweat equity initiatives such as employee share schemes have tax benefits. There are ‘Simple Agreement for Future Equity’ notes, commonly known as SAFE notes. And of course, venture capital, private equity and even ‘angel investment’. Let’s explore these below.
Crowd-sourced Funding (CSF)
Crowd-sourced funding allows your business to raise capital by offering equity to the public. In Australia, a business can raise up to $5 million a year using CSF. Contributors can put up to $10,000 per year in exchange for shares.
Benefits of Crowd-sourced Funding:
- Crowd-sourced funding means you can bypass the venture capital firms
- CSF platforms help you get noticed in the market by running campaigns.
Drawbacks of Crowd-sourced Funding:
- Only wholesale investors can invest more than $10,000 per year
- Existing shareholders equity will be diluted.
SAFE Notes
A SAFE note is an agreement for an investor to up-front money in exchange for the right to acquire shares in the future when a trigger event occurs.
Benefits of SAFE Notes:
- Safe notes have no maturity date and no interest rate payable of the upfronted funds
- They can include a valuation cap, which is the maximum value the instrument will convert at.
Drawbacks of SAFE Notes:
- When converted, the shares will dilute equity for existing shareholders.
Sweat Equity
While not a direct way of getting funds into the business, sweat equity can ensure you keep more money in the bank, while still executing on your key growth strategies. Instead of receiving cash payments, service providers or employees provide their services at a discount, in exchange for equity in your business.
Benefits of Sweat Equity:
- Get the skills you need now without having to pay in precious cash
- Retain valuable people and their skill sets as they have a long-term connection to the business unless they sell or relinquish their stake.
Drawbacks of Sweat Equity:
- Sweat equity deals will dilute existing shareholders interests
- Disputes may arise on the value of services provided in relation to equity given
Angel Investment, Venture Capital and Private Equity
Although the technical definitions of these entities are different, the common theme is that they are groups of people and organisations that in exchange for their money, influence and business expertise will take a stake in your business. While you might feel like you're swimming with the sharks, finding the right sophisticated investor could transform your business as they become a partner and valuable contributor.
Benefits of VC, Angels and PE:
- Funding can be substantial and turbocharge the growth of your business
- Generally these organisations have access to operational experts that can get involved in your growth strategy and make a significant impact.
Drawbacks of VC, Angels and PE:
- Funds may come with strict conditions on how the business is run and who holds keys decision making positions
- Investors may ask for significant equity in exchange for funds and you might not have much leverage in negotiations.
Access The Right Funding Strategy For Your Small Business
This list of funding options is not exhaustive, but what it highlights is that many small business funding options exist. To discuss the best way for your startup or small business to get funding to grow, simply book a meeting with a BlueRock advisor. We’re always up for a business adventure, no matter how wild the ride might be.
