Understanding the finance options available to your business
Finding the necessary funding for their new business idea is one of the top most things that business owners think about. After all, if you do not have the required capital for your business, forget about making it a success – you may find it impossible to get the business off the ground. Fortunately, there are several types of financing options available to people who want to start their own business. Each of these financing options has its individual pros and cons, which is why it is necessary to understand them completely so as to choose the right one for your business.
Here are some options you could apply for your business
Warning about Borrowing
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
- For information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor
- Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan
- If you are on government benefits, ask if you can receive an advance from Centrelink: Phone: 13 17 94
The Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.
Ways to fund a new business
Following are some popular options for raising finance for a new business which you may want to consider:
- Bank loans: Taking a business loan from a bank or other type of financial institution is one of the most common ways of raising business finance. This type of funding is known as debt financing. In order to receive debt financing, you should typically have a well written business plan that clearly shows your cash flow, business assets and your projected return on investments. Banks will usually provide loans to new businesses if they can see the merit in the business idea. You may be required to put up some collateral if the bank requires you to do so. Once the required financing has been received, repayments need to be made as per the repayment schedule set by the bank. The rate of interest charged on the loan will depend on your credit history as well as the personal relationship that you have with your bankers. The entire amount of loan can be taken up front, or you can choose to start a line of credit that enables you to pick up necessary funds as and when you require.
- Venture capitalists: Approaching venture capitalists is another way to get financing for a business. While this method of funding is more popular for growing a business once it has achieved a certain level of success, many venture capitalists also invest money in new start-ups. However, it is not always easy to attract a venture capitalist to invest in your business and you will need a really great business plan to get such type of funding. Venture capitalists work on profit basis and are always looking for the best returns on their investments, but some may also accept a part of the equity in the business in return for the necessary funding.
- Angel investors: Angel investors are typically private groups or individuals who loan money to new businesses. Most angel investors will ask for some equity in the business in exchange for the money that they loan to the business. In addition to providing funding, angel investors are also known to offer business advice and expertise as they have a vested interest in the success of the business. This type of funding is becoming increasingly common all over the world, especially for those people who do not mind giving up equity in their business rather than pay hefty interest to the banks. This is a type of equity financing which may be an option for business owners who cannot get debt financing from banks and other financial institutions. However, if you do opt for this type of business finance option, you must be willing to share the control of your business with your angel investors.
- Credit cards: Using credit cards to finance business needs is a great option for people who do not require huge funding. If you require a small amount of money for your new start-up, you can easily use your credit cards for raising the money. Not only can you buy essential items with your credit card, but you can also get a cash advance on your card; the amount of which will depend on your card limit. Many banks provide credit cards that have low introductory rates and zero card charges in the first year. Hence, you can make use of such credit cards to finance your business or to manage cash flow problems once your business gets off the ground. However, credit cards should not be used as a means to obtain long term loans as the interest on credit cards can be extremely high.
- Friends and family members: Raising business finance from friends and family members is also a very popular way to get the money that you need. The advantage of raising money in this manner is that eligibility and repayment terms and conditions can be less strict than what banks offer you. There is also the added option of giving equity in the business to your family members in return for their investment. However, since you do not want money matters to spoil your relationship with your loved ones, it is best to have a proper agreement for the loan, much as you would with other types of investors.
With a great business plan in hand, you can raise business finance from any of the funding options mentioned above.