Business is booming, orders are flooding in, the phone is ringing off-the-hook… it all sounds great but there’s a problem – you don’t have the capital to support the growth.This is a very real challenge for many growing companies, so much so that it can destroy your business. However it is a challenge that can be easily addressed once you know your funding options.
So what are my funding options you ask? In short most small to medium sized enterprises (SME’s) have two options to fund growth above and beyond what can be achieved using in-house capital resources. The two options are debt funding and equity funding.
Debt Funding
When it comes to externally sourced capital most businesses automatically think of approaching their bank for a loan. However, since the credit-crunch, debt funding for SME’s has become extremely difficult to secure. Of late, the press has been filled with article after article on how tough the banks have become in their lending practices to Australian SME’s. These tighter credit lending criteria are not just limited to early-stage businesses – there are now frequent reports of well established companies that are not only being denied additional debt finance but are also having their existing credit facilities reviewed.
Prior to the GFC, financial lending institutions already had in place rigorous ‘hoops’ that SME’s had to jump through in order to secure credit facilities such as an Overdraft. In most cases these debt-based facilities were required to be secured against assets owned by the company and where the company had limited assets then Company Directors were often required to put personal assets up as collateral to secure the loan. That was pre-GFC so you can image what is now required (both in terms of criteria and costs) to secure similar facilities.
So in short unless you have a highly profitable, well-established business, debt funding facilities to support growth might not be for your business at the moment. Even if you do manage to secure a loan facility, there is a dark-side to debt in that the secured nature of the loan can place at risk both your business assets and your own personal assets.
Equity Funding
OK, so what’s the alternative….EQUITY. Most SME’s are well aware of traditional debt funding (as discussed above) however many are much less aware that they can actually replicate their larger, listed-company contemporaries and raise capital by issuing shares to investors. Sounds interesting doesn’t it, so as a SME what equity capital raising options are there…. broadly you have three options:
1. Attempt to raise capital yourself
2. Venture Capital
Raising Capital Yourself
Although it is possible to attempt to raise equity capital yourself this comes with some serious drawbacks:
1. It requires specialist skills to structure, plan and administer fund raising from investors
2. You are very restricted in terms of who you can approach and how much you can raise
3. It’s costly as it is often done under ‘full disclosure’ or prospectus
4. It’s a legal minefield
A number of recent legal cases have highlighted the risks. In one example a company in the property space raised $3M and was later found to have breached some of the capital raising provisions of the Corporations Act. The successful prosecution from this case and other cases have resulted in jail-time, the directors being forced to return all investor monies and winding up of the company. In short it is a legal minefield and you are highly restricted in how you can market the offer, who you can approach to invest and how much you can raise.
Venture Capital
Venture Capital firms play a vital role in supporting innovative Australian companies. The downside is they are extremely selective in terms of the companies they will invest in. According to the latest AVCAL Activity Report there were only a handful of companies Australia-wide that VC firms made new investments in during FY2010. The other factor to consider is that the VC investment model is often predicated upon taking board representation and often a sizeable ownership stake in the investee company.
The flip side to this is that if you are one of the select few that gets a VC deal away, very often the VC firm will have extremely well developed industry contacts that can ‘open doors’ for your business nationally and internally. In short it may be worth considering venture capital but don’t be too disappointed if you get knocked back – there’s only a few deals done in the VC space each year.
