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4 ways to generate capital

by Intuit Australia

3 min read

Business growth often requires a healthy injection of funding. So, what are the best sources?

1. Bank loans

A bank loan is a conventional means of generating finance; however, it is not necessarily a cheap or guaranteed funding option. Banks tend to be averse to risk, so ensure you have a well-researched business plan to present to your prospective lender.

Brian Machray, director of small business consulting firm Corporate Crafting, says banks can provide small and medium businesses with a range of products that can help businesses to grow. “There can also be attractive incentives for small businesses to move all their banking across to the one bank,” he says. “This kind of cross-selling is viewed favourably and can lead to better rates and access to more applicable products, depending on your type of business.”

Bank loans come with drawbacks. There are fees and charges and pricing can vary widely, depending on the perceived risk associated with your business. “It can also be difficult for small businesses to attract debt funding without equity being put into the business,” says Machray. “And attracting too much debt can encumber your balance sheet and make it unattractive to other sources of funding.”

2. Venture capital

Venture capital is money provided by corporate investors to businesses with perceived long-term growth potential.

“A huge positive of venture capital is that the quantity of funding is pretty much unlimited,” says Machray. “If you manage to attract venture capital, it will usually come with market-leading support and highly sophisticated teams to help facilitate the funding process and the wider strategic goals of your business.”

However, venture capital is rarely accessible to businesses that cannot guarantee high returns. “The reality is that venture capital is reserved for companies that are highly scalable with meteoric growth projections,” says Machray. “The last time I looked, only about 2 per cent of venture capital applications were actually being approved, and the lead time to get an application approved is six to 12 months, because the due diligence process is very strict.”

3. Crowdfunding

Reward-based crowdfunding is suited to start-ups, as it offers a means to raise money from the general community in exchange for non-financial rewards or pre-selling your product.

To access crowdfunding, you need a genuine project, a monetary target and a crowdfunding platform host, such as Pozible and Kickstarter.

“The number one benefit of crowdfunding is that it’s free,” says Machray. “You need to generate quite a lot of awareness and publicity for your project using social media, so you also get a lot of ancillary publicity off the back of the crowdfunding process.”

Crowdfunding can also provide a good indication of consumer interest in your business venture the more people who donate money to you, the more popular your business is likely to become.

One of the drawbacks of crowdfunding, however, is its “all or nothing” model if you don’t quite reach your funding target, you don’t get any of the money. “It’s also very difficult to scale crowdfunding,” Machray points out. “It’s really an embryonic cash donation suited to start-ups or quirky businesses that have a fashionable image or altruistic goal. To succeed in crowdfunding, you also need to turbo-charge your social media.”

4. Angel investors

Angel investors are wealthy individuals or groups who provide their own capital to small businesses in exchange for equity ownership.

“Angel investors tend to be senior business people, so they can help you with your support network to get your business up and running,” says Machray. “The money is accessible with a due diligence process which, in comparison to venture capitalists, is less restrictive.”

Angel investors look for medium-to-high returns over a short-to-medium period. “One drawback is that there will be some loss of control for an entrepreneur looking for an angel investor,” says Machray, “because they will typically take shares, which obviously dilutes the control of the entrepreneur.”

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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