Your business will need money to launch, grow and reach its potential. You will 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, we have created a two-part article guide to step you through how to finance your business.
You will most commonly finance your business through a loan, grant, convertible note, equity or raise money through crowdfunding. But what do these actually require? What are the benefits and disadvantages? It is important that you understand what each method entails to then decide the best option for you and 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 the 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 your business’ shares. It can be difficult, however, to receive 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. The Australian Government offers a variety of grants in a range of industries.
A grant’s primary advantages include:
- The business is not in debt,
- There are no interest payments,
- The founder(s) do not issue shares, and
- The business does not have to repay the grant from its cash flow.
For these reasons, if you can obtain a grant, they are an excellent way to help finance your business. They are, however, competitive and if you do obtain one, attract strict requirements and regulations. For example, to create jobs or export goods.
A convertible note is a written promise issued to your investors. They provide you with capital in return for a certain number of shares once a trigger event occurs. For example, when your business raises a certain amount of money, the investor receives the agreed amount of shares at a discounted rate.
Why would you use a convertible note? Well, 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.
LegalVision’s experienced business lawyers can assist you with deciding which financing options to choose as well as the legal steps, negotiations and documents you will need. If you have any questions, please get in touch on 1300 544 755. In the meantime, please continue reading how you can finance your business through crowdfunding and equity financing.