For start-ups, options for accessing funds usually begin with family, friends, your savings, or mortgaging your home. But there are other financing options to consider as well.
The first questions to ask yourself when finding funding for your business are: what does my business need and do I really need money to achieve it? There could be ways of getting what you need without spending any (or much) money.
For instance, if you need a strategic plan, your state-funded small-business body probably runs strategic planning workshops, or offers experienced advice through a mentoring service. Business mentors can also be found through professional organisations, or local government economic development units.
In business language, this approach is known as bootstrapping – or making the most of stretched resources – and it is a common strategy for new businesses.
Bootstrapping relies greatly on networks, trust, co-operation and the wise use of existing resources, rather than going into debt or giving away equity. Here are some examples:
Bootstrapping for product development:
- Develop the product at night while working elsewhere
- Turn your customers into researchers for you
Bootstrapping options for business development:
- Forgo, reduce or delay your compensation
- Use your credit card or take a home equity loan
Bootstrapping options to minimise the need for capital:
- Buy used equipment instead of new
- Co-ordinate purchases with other businesses (mutual purchasing of goods)
- Share business premises with others or run your business out of your house
- Employ relatives or friends at non-market salaries
Bootstrapping options to meet the need for capital:
- Pay employees with company shares (give employees some ownership)
- Delay payment to suppliers
- Barter under-used products or services with other firms
Want more articles like this? Check out the business startup section.
For start-ups, the role of family investment, or “informal investing with aunty” should not be underestimated. It’s worth developing a kitchen-table pitch and considering the motivations of family members before you do the pitch. You should always safeguard yourself – and your family relationships – just as much in this type of negotiation as in any other, including having a written agreement.
Retaining your business independence and not giving family members any voting rights or roles as directors is also advisable. If possible, avoid a repayment schedule in favour of timing your repayments to your cash flow.
If you belong to an ethnic community, you may have additional opportunities from within this community.
Another financing option is to get an equity partner who provides you with investment, and a ready-made mentor. These are known as angels – and they do exist!
Angels can either be informal or part of a formalised group, which may be more risk averse. Three of the main ways to find informal angels include: approaching your accountant, who may have wealthy clients looking to invest; joining networks such as industry associations; or thirdly, explore the expat scene.
Expats who have been successful overseas often come back and invest in Australian business. You can investigate expat networks and create relationships with members while they are overseas. This is especially useful if you are looking at exporting, with the biggest opportunities being in Asia where there are large networks of expat Australians.
Depending on where you live, there may be a formal Angel Investors program in your region. These consist of private individuals, who typically have been successful entrepreneurs, who group together and invest in the early stage of start-ups.
The key factor to understand is that no matter what approach you decide to take – even if you are using all your own resources – your business must be underpinned by a well-thought-out and researched business plan that includes a risk mitigation strategy. All banks, investors, angels and grant providers need to see this.
In addition, finding the way forward for your business will require tenacity, focus and the confidence to approach potential investors or collaborators.
How did you finance your business when starting or growing? Please share your tips.
Want more business financing tips? Read David Solomon’s article on crowdfunding for small business.