Your business needs money to launch, grow and reach its potential. You need funds to develop concepts, boost marketing and hire staff. If you can grow a money tree, access a large inheritance, or make a fortune busking on the side, you could be set! For the rest of us – keep reading.
The key methods to finance your business are through a loan, a grant, issuing convertible notes, issuing shares (equity finance) or raising money through crowdfunding.
What do these require? What are the benefits and disadvantages? You need to understand the pros and cons to decide the best option for your business.
A loan can be secured or unsecured.
- A secured loan involves providing a form of collateral as an assurance that the loan will be repaid. A well-known example is a bank taking a mortgage over your house or shares. This means that your personal assets are at risk if the business does not succeed. If your business has sufficient assets, the bank can take a general security arrangement over your business.
- For an unsecured loan, the lender has no security. The most common examples are credit card debt or an overdraft. These only provide limited funds, have high interest rates, and are short-term solutions. The lender assesses the risk based on your credit reputation and ability to repay the debt. Unsecured loans are difficult to get unless you have a good relationship with the lender and have done business with them previously.
One key advantage of a loan is that you are not required to issue any equity in your company. You (and any other shareholders) retain control of the shares in your business. However, it can be difficult to get a loan as a new business and your personal assets are often at risk.
Government grants are available for small businesses and startups to help you launch and grow your business. There is a variety of grants available in a range of industries. This page provides useful guidance.
A key advantage of a grant is that the business is not in debt, there are no interest payments, and the grant does not have to be repaid from the businesses cash flow. Also, the founder(s) are not issuing shares. For these reasons, grants are an excellent way to help finance your business if you can obtain a grant. However, grants are seen as difficult to get, due to high competition. Grants generally come with requirements and regulations that your business needs to follow, for example, to create jobs or export goods.
A convertible note is a promissory note or a written promise issued to your investors. The investors provide you with capital, and in return they receive a certain number of shares once a trigger event occurs. This can be when your business raises a certain amount of money, at which point the investor receives the agreed amount of shares at a discounted rate.
Why would you use a convertible note? You can delay valuing your business. This prevents giving away too much equity in your company too early. For this reason, it can be difficult to get investors interested in taking a convertible note rather than shares, but there are ways to help create a convertible note that is more appealing to potential investors. Please let us know if you would like advice.
Issuing shares in your company is a well-established method to finance your business without going into debt. You can issue different types of shares, for example, ordinary shares or preference shares.
You need to follow the exemptions that enable companies to issue shares without a disclosure document. As a small business, you can only issue shares under personal offers (up to 20 investors raising up to $2m in 12 months), to sophisticated or professional investors, or to people associated with the business including senior management.
Why would you issue shares? There are no ongoing payments, so a higher percentage of revenue can be spent back on the business, for example, to do more marketing or hire more staff.
You share the risk of your business with your investors; however, this means you share the value and ownership of your business with your shareholders. Shareholders might want more control and oversight of your business than you prefer. We can help you negotiate this in the Shareholders Agreement.
Crowdfunding allows members of the public to contribute money to a product or service that may not yet have launched. A common example is buying in advance, such as a unique product or an album, on the basis that you will receive the item once the business raises enough money to finalise the product or service. Crowdfunding is often done through platforms like Kickstarter and RocketHub.
Crowdfunding is a great way for your business to gain broader exposure. It allows members of the public to support you in your business goals. You may obtain more funds, or receive funds more quickly than through traditional sources. Currently in Australia, it is difficult for small businesses to crowdfund because of the legal restrictions on offering shares. The Government is now looking at different ways to provide shares to a broader audience, to assist businesses in using crowdfunding to issue or sell shares in their business.
We can help you decide which financing option to choose, and assist you with the legal steps, negotiations and documents. You will also need financial and/or tax advice. For friendly and experienced legal help, please contact us at LegalVision on 1300 544 755.