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Finance Options to Grow Your Business
Finance Options to Grow Your Business
It takes money to make money. While every small business needs capital to get started, seeking additional business finance can be a crucial step in building and growing your small business to take it to the next level. Before you seek additional finance to grow your small business, it’s important to know the finance options available to you.
Why do you need finance for your business?
When looking to source additional finance to expand your small business, it’s important to identify why you need the additional funds.
Business finance is often used to invest in capital or acquire new assets that will enable your business achieve your business and profit objectives.
Things to consider when identifying the purpose of business finance:
- Do I need additional funds to increase the production or service capacity of my business.
e.g. By purchase capital items such as equipment, buildings, machinery or motor vehicles.
- Do I need additional funds to fulfil an increased demand for my products and/or services.
e.g. by increasing trading stock, supplies or staff?
- Do I need additional funds to expand distribution or develop new markets.
e.g. By developing an e-commerce website or hiring new business development and sales staff.
- Do I need additional funds for research and development.
e.g. To market research, develop and test a new product line.
What to do:
- Identify the purpose of funds
What will you use the business finance for? Identify the purpose of the funds sought might involve conducting some preliminary market research to determine, for example, wether there is demand for increased supply or production of your goods or services.
- Identify a finance amount
Make a realistic estimate of how much business finance you require.
- Identify business objectives
Set clear growth and profit objectives for the new ventures that will be funded by the additional finance you’re seeking. Update your business plan accordingly.
Business finance options
There are two main financing options to grow your small business.
Business loans
The most common type of finance for small businesses is in the form of a business loan from a bank or other financial institution. Business loans are provided subject to specific terms and conditions for repayment with the borrower repaying principal and interest. Lenders will evaluate the risks of a business and seek security (collateral) to cover the risk of default.
Business loans from a bank or financial institution can be short, medium or long term loans.
It’s important to undertake a thorough cost-benefit evaluation of your business loan options to identify the most suitable loan for your needs. For example a short term loan such as bank overdraft facility might be the most appropriate and cost effective option if you require finance to cover periodic cash-flow shortfalls in terms of your day-to-day operations.
A Medium term loan might be more suitable if you require business finance for a 3-10 year period to finance equipment, business expansion or development of new product lines.
If you require finance to purchase land, property or other businesses in order to expand your operations to boost profit over a period of years, a long term loan will probably be the most suitable business loan option.
Equity Finance
The other main financing option to grow your business is through equity finance. Equity finance is capital provided by shareholders or investors in the business which may be yourself as the business owner or external parties. Prospective investors essentially provide funds in exchange for a share (equity) in your business. Equity investors provide total risk capital, and have no security to call upon if the business does not perform as expected.
Equity finance can be sourced through a joint venture, venture capital funds or private investors often referred to as "Business Angels".
What to do:
- Assess your borrowing options
Evaluate the terms, repayment options; interest rates; incentives; location and service of the business loans available to you.
- Prepare an investor prospectus
If you are seeking equity finance to grow your business, prepare an investor prospectus that meets your business needs in consultation with a lawyer, accountant and business planning professional.
Applying for business finance
When you’re applying for business finance from a bank or financial institution you will need to make a formal application. Your application should provide sufficient information to the lender so that they can make an adequate assessment of the viability of your business venture.
Your loan application must be able to demonstrate that you have a clear business strategy and a cash flow and finance management plan for repaying the funds sought.
What they will need to know
In assessing your loan application, banks and financial institutions will typically require the following information about your business:
- the purpose of the loan. E.g. for equipment, trading stock, machinery etc
- the amount of finance required, e.g. an overdraft of $50,000 for the first twelve months or $100,000 over 10 years
- the amount of funds contributed by the business owners/shareholders
- your plan to service the debt and meet the loan repayments
- your business cash flow management
- business operating risks
- security that you can offer to support the loan. E.g. property, your business premises
- your business plan and strategy
- experience and track record of the owners/managers
- your financial history, or the financial history of the business
- the assets and liabilities of the business
- any other debt or arrangements that you have with other financial institution
- your business insurances
What to do:
- Talk to the lender
Get in touch with the financial institution that you’re seeking funds from as early as possible to discuss their application requirements in full.
- Consult an accountant
Prepare your business finance application with the assistance of an experienced accounting professional.
- Allow for processing time
Allow adequate time for the processing of your application and put a contingency plan in place in the event that your business loan does not get approved.
Government information portal for business including a information on growing your business and financial management. Independent body providing information and guidance to small business including financial advice for growing your business. The Federal Government's agency for delivering assistance, programs and services to support industry, research and innovation. Information to help start, grow or manage a small business including advice and resources on business financing options. |
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