Advivo Accountants and Advisors look at what options to consider in funding your growth strategy
I’m often asked what’s the best way to fund a growth strategy and which options are more suited than others. The answer is often not as straightforward as we’d like. In all cases, it depends on the strategy being implemented, the budget required and your forecasted timeline. In short, there are many funding options available for small to medium businesses/enterprises (SMEs), including some ‘outside of the box’ solutions, which tend to be overlooked.
This article provides a brief insight as to options available for SMEs, along with pros and cons which will help decipher which is best for you. If you’re one who prefers to cut to the chase, we have a short-form guide available in the reference section of the Advivo website which will help narrow your focus to those that could work best for your particular circumstances. Importantly, this guide is not an exhaustive list. There may be options relevant to your unique circumstances that are not shown. Please contact us if you have a unique situation you would like assistance with.
“The guide is good – why should I keep reading?”
SMEs can need funding for many reasons. In relation to growth, funding is often needed for anything from developing and commercialising a new product or service, to expanding into new markets (including new industries or geographic locations). Choosing the wrong option for funding can be costly and can even be the difference between achieving your goals or not.
“That’s great, but where do I start?”
Firstly, your business’s success depends on how well you have planned and executed your management and growth strategy. It’s important you understand the associated funding requirements inside and out. Our business advisory services combine our expert accounting consultant advice and management practices to take your business to the next level. You need to do your homework to know what you’ll need and when you’ll need it. A cost model and budget forecast for your strategy is the best way to understand your funding requirements and is also a good place to detail any assumptions and reasoning used (this will create visibility and help save time and costs later). Your forecast will then form the base of a resource plan for your growth. This is important because not all requirements will be financial. For example, it may take 3-4 months to procure and train suitable personnel for key roles and stages within your strategy.
“I’m across the numbers, so how do I choose the best option?”
Various funding options will mean different things for you and your business, both now and in the future. For example, if a debt funding option is chosen (i.e. a loan), it could mean less profits are available to distribute in the short term as there will be additional cash required to service the new debt. If on the other hand an equity option is chosen, it will mean ownership could become diluted depending on who is receiving the equity. This can be costly for existing shareholders in the long term.
“Okay, so just debt or equity then?”
Not necessarily. The best option for your circumstances could be a combination of both or even a hybrid type arrangement which could convert debt to equity depending on certain outcomes.
“…but we’re a family business. There has to be an easier way”
There is, and depending on your circumstances, a loan from existing shareholders (which falls under the ‘Friends, Fools and Family’ option in our short-form guide) could be the easiest and most cost-effective way of meeting your needs because whilst we would still recommend documenting all arrangements, the level of documentation required for this type of funding would likely be less onerous than that required by other more formal methods. Whilst this is technically a form of debt funding, many just associate ‘debt’ with banks, but there are often other sources of debt funding like Angel Investors, or High Net-worth Individuals looking for a return on investment for a term loan. The same is true for equity. There are Private Equity investors that bring additional benefits of experience and board positions etc. Many people focus solely on debt or equity options alone, but what about prepayments/pre-orders or even a crowdfunding campaign?
“Did you say Crowdfunding?”
Yes. In the right circumstances, crowdfunders like Kickstarter or Pozible can be an excellent platform for fundraising, particularly in the tech space. Importantly, if you’re considering a crowdfunding campaign, be sure you’ve checked and double checked your budget requirements and are clear on the tax/GST implications of your particular campaign. There are also ASIC requirements to be aware of for equity-based campaigns. Most crowdfunders are normally on an ‘all or nothing’ basis, so you really only get one shot with them which means it’s crucial you invest the time and energy to make sure your campaign has the best chance of success.
Tip – Research various campaigns to understand the difference between those that have been thrown together vs. those that have been well planned and executed, and don’t forget ‘looks’ alone may not be enough to succeed. You should still have a robust plan around timing and implementation of such a strategy.
“Alright, I understand there are many options, but where do I get the info I need?”
Right here! Now that you understand there are many different forms of funding and that within each general form there are also many variations which could be considered, our short-form guide provides a high-level overview of various funding options including pros and cons of each. Use this guide to help identify those which may be better suited to your particular needs and don’t forget that a hybrid approach may suit you best. Then we recommend talking to an expert to determine the single best option appropriate for your unique circumstances. We’re here to help you make the right choice for your needs, so don’t be afraid to seek advice from us.
NO ADVICE – Disclaimer:
The information contained in this presentation is general information only and has been prepared without taking into account your personal objectives, financial situation or needs. The information provides a high-level summation of selected parts of legislation only. The legislation is complex and includes a number of conditions and overrides that may apply to individual situations. Interpretation and application of the information to your specific circumstances require consultation with an accountant with a detailed understanding of your personal and taxation affairs and a qualified financial advisor before taking any action.
Written by Chris Morris