Each and every year in Australia, thousands of new businesses start. Two of the questions I am commonly asked as an Accountant are “How do I source capital as a start up?” and “what sort of loan should I apply for?”

We have prepared a short guide on the factors that we think are important for any new business looking to secure funding.

Start with a Business Plan

Before you even think about looking for funding, ensure that you have an accurate and detailed business plan that addresses all aspects of your business. You should prepare a comprehensive document which addresses at least the following points:

• Structure
• Ownership
• Products
• Points of difference
• Cashflow projections
• How you plan to market the business or product.

There are hundreds of templates on the market to guide you through this, or you can pay a consultant to write this for you. Regardless of whether you are seeking private funding, bank funding or crowd sourcing, almost everyone will want to see a well thought out business plan.

The Victorian Government has a great business plan template available at: https://www.business.gov.au/business-topics/templates-and-downloads/business-plan-template-and-guide/Pages/default.aspx

Consider what options you have for borrowing

There are many options available for sourcing capital for a new business, and entrepreneurs today have countless options that were unheard of even 10 years ago. Consider the following funding options for your new business:

• Family or friend personal loans
• Crowd sourcing
• Venture capital or ‘angel’ investors
• Private finance arrangements
• Bank finance

All of the options above are viable, and all have their own unique advantages and disadvantages. The decision you make on funding really comes down to the following questions:

• How long do you need the loan for & how long does the lender intend to lend the funds for (i.e. short term, long term)?
• How much can you afford to repay (I.e. principal/principal & interest)?
• Do you need all of the funds upfront, or a small upfront with a draw-down facility?
• What is the interest rate?
• Do you need to provide security (i.e. your home)?
• Are you comfortable with application and bank fees?

All of these factors need to be taken into consideration when you are considering potential funding options.

 Borrowing from Family or Friends

A private loan from friends or family can be a great option for funding your business. Terms can often be flexible, it saves bank fees and applications costs, and in some cases the party lending the funds does not want interest paid initially (or only a nominal amount).

However, loans from friends or family can also be tricky if terms are not clearly defined. It is important when borrowing from close acquaintances that the terms are clear, and that detailed instructions are drawn up with each party acknowledging and agreeing to the terms. This can save on future headaches or disagreements, particularly from a legal perspective. If there was ever to be a dispute or even if one party was to pass away, the intention and purposes of the loan is well defined for all to see.

Crowd funding/Venture Capital/Angel investors

Crowd funding or crowd sourcing is a relatively new manner in which to obtain capital for your business. Most people are familiar with venture capital and crowd funding  works in a relatively similar way. In basic terms, you offer out to a group of investors, another company or even for the general public to provide funding for your business. This can be in exchange for shares, a future payment, products or services or simply the providing party can gift the funds to you as a donation. The options are very flexible, and come down to what you as a business owner are comfortable with.

Crowd funding can be another cost effective way to setup your business, and it is becoming quite a mainstream method for sourcing capital. Once again, there can be complications if the terms of funding are not clear, so make sure that all parties are very aware of the implications of investing via these methods and this will limit headaches. A great resource on crowd funding can be found at www.rockethub.com/education

Bank Loans

Bank loans are the most common source of funding for a small business, and many provide flexible terms and repayment options, with redraw & other draw-down options. However, bank loans can be difficult for a start-up to obtain without providing security first, and this is why a business plan is so important to have prepared prior to sourcing out funding. If you have not yet prepared your business plan, go back to step one of this document.

Examples of bank loans include:

• Term loans: A loan paid back over an agreed period (term) where principal and interest are paid off in monthly repayments.
• Bank overdrafts: borrowing up to a certain amount from your bank when the need arises, allowing for flexibility and convenience.
• Mortgages: used to finance the purchase of land and buildings. It is generally repaid by regular installments including principal and interest.

Leasing

Although less common, there is also the option of leasing for new businesses, particularly where equipment is required. Leasing involves a financier purchasing the equipment that you require and then leasing it to you in return for regular rental payments for the duration of the lease term. At the completion of the lease term, you are offered the option of purchasing the equipment at an agreed residual value.

Expert advice can be the difference between success & failure

Setting up and running a new business is exciting, terrifying and satisfying. That is why it is so important to seek expert advice from a well experienced accountant, law firm or financial adviser who has business skills and can set you on the right path. The difference between success and failure often comes down to surrounding yourself with experts who can step in and help when your abilities are limited. This doesn’t make you a bad business owner, in fact, it places you into a position where you have the best opportunity to succeed. Even Richard Branson has business advisers to help him along the way.

Before making any financial decisions in relation to the matters discussed in this document, including when considering starting business, please seek professional advice. You can phone us on (03) 9999 7200 if you would like to speak to any of our business advisers.

Disclaimer: All information provided in this newsletter is of a general nature only and is not personal, financial, taxation or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.