Have you ever wondered why it’s so challenging for small and medium-sized businesses to secure the funding they need to grow?
Despite having years of profitable results, loyal customers, and stable revenue, many business owners need help accessing the necessary capital. Financial institutions often remain cautious, imposing heavy restrictions and high interest rates to mitigate their perceived risks.
This reluctance can hinder a business’s potential to expand and succeed.
Understanding Business Growth Phases
Every business experiences several stages of growth, such as:
- Expanding products or services
- Enhancing market position
- Preparing for future development
To maintain progress during these stages, it is essential to have access to the necessary capital for growth, acquisitions, or expansion.
So, what are your options as a small business owner? Let’s break it down below with a few options to consider. If you want to understand each option on a much deeper level and how it may impact your financial health moving forward, contact Growth iQ for a strategic discussion.
Equity or Debt Funding Options
When financing your business for growth, you have two primary options: using your own funds or seeking external funding through debt or equity.
Self-Funding:
Personal Savings or Family Loans
Say you have $50,000 in savings or borrow $20,000 from a family member. You can use these funds to invest back into and grow your business. This approach keeps you in complete control and retains your equity.
Personal Loans
Suppose you take out a personal loan of $30,000 secured against your home. This loan might have a lower interest rate than a business loan and can be used to fund your business operations.
Equity Funding:
Angel Investors
An angel investor might provide $100,000 in exchange for a 10% stake in your business. They take on more significant risks and expect high returns, often investing at the early stages of the business lifecycle.
Private Equity
Imagine a private equity firm invests $500,000 into your business to help enhance profitability. They aim for a profitable exit, such as selling the business or going public.
Venture Capital
A venture capital firm might invest $1 million into your business while also providing strategic guidance. This funding helps scale your operations significantly.
However, introducing more owners can dilute your equity. For example, if you originally owned 100% of your business and then sold 20% to an investor, you now own 80%. New owners may have different opinions on how the business should operate, which can lead to potential conflicts.
Financing through Banks or Non-Bank Lenders
Another option for growth funding for small businesses is obtaining a loan from a bank or non-bank lenders. Banks use the Five Cs of Credit (capital, capacity, collateral, character, and conditions) to assess a borrower’s ability to service and repay a loan.
Time-poor business owners may need more resources to explore all available funding options thoroughly and often turn to banks as a first resort. If a business owner is unsuccessful, they might move to personal finances without realising alternative funding options exist.
Non-bank lenders, a loan provider that isn’t a traditional institution, are often more specialised and flexible, willing to take on different levels of risk. They provide financing for specific needs, including:
Invoice Finance: For example, if you have outstanding invoices worth $50,000, a non-bank lender might advance you a percentage of the invoice value immediately, helping you manage cash flow.
Trade Finance: If you need to purchase goods from a supplier overseas, a non-bank lender can provide trade finance to cover the cost until you receive payment from your customer.
Equipment Finance: If your business needs to buy new machinery, a non-bank lender can offer equipment finance, allowing you to spread the cost over time.
Exploring Grants and Incentives
Government grants can be a valuable funding source for businesses that meet specific criteria. These grants can support growth, exporting, or research and development. However, the process of applying can be time-consuming and quite competitive, depending on the grant on offer. Professional assistance can increase the chances of grant approval.
If you are considering applying for any upcoming Government grants, consult with one of the Growth iQ advisors for help with the application process.
For SA-based small businesses, the Office for Small & Family Business website provides more information about state-specific grants.
Choosing the Right Funding Option for Business Growth
While equity and debt are primary funding streams, don’t overlook other sources like grants and incentives. Each funding option has its own advantages and challenges.
Careful consideration and professional advice can help you choose the best path to secure the necessary capital for your business’s growth.
For bespoke guidance tailored to your business, contact us at [email protected] or call (08) 8126 4100.