As businesses grow, they consume cash, and while some businesses can fund growth from cash flow, most will require some level of external funding.
Choosing the right option for new or small businesses can be difficult, but lack of funding can restrict the growth of the business.
It would be simple if your business worked like this:
Unfortunately, in most cases it works like this:
When you have to pay for stock before you get paid for selling it, not to mention cover all those overheads, your business is likely to have a cash flow problem.
What is Business Financing?
If you are buying a business or expanding an existing business the funds or capital can come from a variety of sources such as a bank loan, crowdfunding, angel investment, grants, or money raised through family and friends, though in the first instance, this tends to be your savings.
For very early-stage start-ups we often see the founder working in paid employment, while building the business in their spare time.
Raising additional or early-stage funding (known as seed capital) is often a riskier investment for those willing to lend you money (such as angel investors) and this is reflected in the amount of equity they require of your business.
If you are already in business and are making money, this shows that the company is profitable or at least has a market for your product or service, and therefore isn’t such a risky investment. The lower risk will mean more favourable equity demands or interest rates.
5 Ways to Finance Your New Zealand Business
When it comes to financing your business there are many options to consider. However, as with anything in business, you should seek professional advice as to the best course of action you should take.
Here are 5 ways you can finance your New Zealand business:
1. Bank Loan
Before borrowing money from a bank, you should ask yourself if you can afford to make the repayments. If you don’t think you will be able to pay back the loan and make the repayments, then you should look to only borrow what you can afford to pay.
Although a bank loan is a popular way for many business owners to grow their companies, it doesn’t mean is it the right decision for you.
Consider a bank loan if:
- You are confident you can make the repayments.
- Are likely to pay it off early and reduce the amount of interest accrued.
- Need the money to grow rather than to pay off debts.
- You fully understand the terms and conditions.
To help you understand the amount you will have to pay, check out this debt calculator.
Most bank loans require some form of security – if your business assets are insufficient for security purposes the bank may require security over your home or a personal guarantee from you or someone with adequate assets to cover the debt. It is important to get independent advice before agreeing to use your home as security so you understand the risk involved.
Occasionally we hear of business owners who are advised to get a loan because it is tax deductible. This type of advice should be treated with scepticism.
Some banks and finance companies will provide funds secured over plant and equipment or vehicles. This can be at the time of purchase of a new asset or over an existing asset. This includes leasing, hire purchase, and lease to buy.
This can free up cash for growth as well as enable you to pay for assets over a longer period.
3. Crowdfunding
Online investment networks known as ‘crowdfunding’ have become extremely popular over the last few years and New Zealand sites such as Pledge Me and Snowball Effect have helped many entrepreneurs raise the money needed to start their businesses.
The idea of crowdfunding is simple, you set a goal (the amount you need for your business) with a time limit and interested parties pledge money to help you reach that milestone.
Crowdfunding was first designed to help entrepreneurs create relatively low-cost goods whereby people would pledge the minimum amount to receive the product once it was created.
However, more and more startups are turning to crowdfunding platforms for larger amounts of money and the investor’s terms can reflect that.
If you are seeking larger amounts of money to grow your business then approaching an angel investor network may be the right option for you to take.
The advantage of approaching an angel investor rather than opting for a bank loan or crowdfunding is that the angel investor will often want to take a hands-on approach to your business and offer their specific skills in helping your business start, grow, and succeed.
An angel investor is typically well connected, and they can use their extensive network to help increase your business’s chances of success.
However, angel investors are shrewd business experts and they will often require a large slice of your business along with other terms.
If you are considering angel investment networks to start your business, you should understand how the whole process works.
The New Zealand Investment Network is an angel investment network that has connected countless investors with New Zealand businesses.
“Our angel investors are often experienced in their business sector and wish to connect with New Zealand entrepreneurs in similar sectors, or nearby locations.
With thousands of private investors listed upon our network, in a wide selection of business sectors, entrepreneurs are easily able to connect with their angel investor and negotiate terms of investments.”
Click here to read how it works and use this as a good place to start when considering angel investment.
A venture capitalist is a high-net-worth individual that invests in start-up ventures or small companies that wish to grow. A venture capitalist (VC) differs from an angel investor by the amount of money they are willing to invest. Typically, a group of angel investors might invest no more than $1m, whereas VCs would rarely invest less than $1m.
When approaching venture capitalists (or other private investors for that matter) you should ensure that your financial statements and forecasts are up to scratch.
6. Family & Friends
Approaching family and friends to ask for money can be an awkward experience for many entrepreneurs and small business owners.
However, if your startup idea is viable or if you need a little extra capital to help grow your existing business, then asking your contacts for money will help to make this conversation a little easier.
One of the first questions an angel investor or VC will ask you is “how much money have you invested yourself?” and “how much money have your raised from your contacts?”.
They ask these questions to see how serious you are about making the business work, and this also helps them gauge what others think about your idea.
If you haven’t invested your own money or can’t raise funds from those closest to you then why should a stranger part with their money?
You should make your friends and family aware of the risks as well as the potential gains and provide enough information for them to make an informed decision. Consider what return they will receive should your business be successful.
No matter who your financier is you should have available your:
- Annual Accounts and Management Accounts
- Business Plan
- Financial Forecast
Talk with one of our team to find out how we can help.
