Financing business growth

Attracting capital investors is no mean feat, but there are a few ways you can convince investors to finance your business growth.

Whether you’re looking to grow a business or start up a business, chances are you’re going to need capital investment at some point. But let’s face it, getting your hands on extra capital has never been easy, and it’s even harder these days with higher interest rates and tighter lending criteria.

So what to do, and where to turn? “A lot of where you go for funding depends on where you are in your business cycle,” says Sue Prestney, SME spokesperson at the Institute of Chartered Accountants in Australia.

The bad news for start-ups is that funding from outside sources isn’t likely at the early stages. “Generally when you start up, financiers aren’t keen to lend on the balance sheet of the business because there’s no track record,” says Prestney.

“They can’t see any evidence that the business is going to be able to repay them.” The best bet of funding at the start-up phase is either from personal savings, or mortgaging the family home.

But chin up; once you’re a bit more established, the banks are an option, and they offer a nifty thing called invoice financing. With invoice financing, you can convert your outstanding invoices to cash, so you don’t have to wait for debtors to pay you. “Invoice financing can really help by speeding up the operating cycle and freeing up working capital faster,” says Jeremy Dean of Westpac. Flexible funding comes in particularly handy when you’re growing, however, most banks still require about a three-year history before they’ll do invoice financing for you.

Equipment finance and business overdrafts can also be useful, says Dean. “A key benefit of equipment finance is that it allows businesses to acquire the latest technology or additional equipment without tying up capital through large up-front payments,” explain Dean. “It’s also useful for businesses looking for flexible repayment options and in order to ease pressure on your cash flow.”

Business overdrafts, on the other hand, are more suitable for the short-term, says Dean. “Business overdrafts provide easy and convenient access to additional finance in order to cover business expenses such as paying GST, buying stock or meeting payroll.”

But remember that when choosing a financing solution for your business, it’s first essential to understand your cashflow. “Taking out a long-term finance to fund the purchase of new vehicles or plant and equipment may not be the best solution for you,” says Dean.

However if the banks are turning you down, there are other options, including private capital providers; even if they do come with a hitch. “What you have to understand is that it’s an expensive form of funding,” says Prestney. “Private capital providers won’t necessarily be investing in your business as shareholders, rather as lenders, and they will want a very high return for taking an unsecured position.”

And again, it all comes back to what phase of the business cycle you’re in. Start-ups are high-risk, so investors expect a higher return. While the expected return from a more established business is lower, it’s still much higher than what a bank expects from a secured lend. “You go to private capital providers normally when you either can’t get that funding at the start, or you’ve exhausted the limit of what the bank will lend you,” says Prestney.

Alternatively, if you’re a reasonably sized and established business, looking for an option in between bank and private finance, then mezzanine finance might be what you’re after. Mezzanine finance is an unsecured loan with a high interest rate that’s offered by some investment banks. “It’s a loan rather than an investment in equity in the business,” explains Prestney.