There are alternative sources of finance and strategies to help the start-up or developing business.
Crowdfunding raises funds or capital by using online and social media networks to get a large number of people to contribute money towards a project in exchange for a good, service or equity. Generally money is raised through a fund-raising website such as Pozible.
There are tax implications for using crowdfunding so it's a good idea to talk to your accountant if you're considering it. Visit our crowdfunding page for more details.
In business terms, bootstrapping is a way in which a small business can finance its operations without having to borrow substantial amounts of cash. A bootstrapped business is characterised by:
- growth through immediate earnings
- minimal overheads (the start-up easily operates from a garage or spare room)
- use of credit cards and reliance on advances from customers
- use of networks (the product or service works well through direct sales and contacts)
- leasing, rather than buying equipment
- multiskilling (the CEO is also the cleaner; teams and defined roles come later).
Bootstrapping means a business can become operational very quickly, without having to find start-up capital. Bootstrapping suits the very small business that cannot attract venture capital due to its size (but the business may attract capital from larger investors once it has grown and positioned itself). Bootstrapping also suits the company that wants to hit the ground running and take quick advantage of market opportunities.
A web search using the phrase 'bootstrapping business' will bring up many websites with tips and strategies for the entrepreneurial business person who has a great idea, but no finance.
'Business angels' invest in new or expanding businesses. They are usually involved in the business, either directly or as a mentor. Business angels can provide development capital, and they can also contribute their business skills and contacts to benefit a new business. Business Angels Pty Ltd and Australian Business Angels provide registers where private investors and businesses can find each other. For a fee, the needs of the business are matched with the private investor's criteria.
Business angels can be individuals or businesses keen to operate in the area of risk capital (so called because when they invest, they take on part of the risk of growing a new business). The advantage of securing the help of a business angel is that they can make investment decisions fairly quickly.
Venture capital is high-risk capital directed towards new or young businesses with prospects of rapid growth and high rates of return. Venture capital is an investment not only of money, but also of skills and time. Venture capital businesses will provide capital for research and development of a business idea, early stage businesses, later stage expansion, and finance for management buyouts and buy-ins of established businesses.
Asking family members for a loan can result in flexible payment arrangements, and the finance can become available quickly, but it is highly advisable to put your agreement in writing. There is the danger of harming family relationships if things go wrong. In agreeing to a loan, it is advisable to set things up in as business-like a manner as possible.
Selling a share of your business
Shares represent part-ownership in a business and, if the business trades profitably, the shareholder will get payments in cash, called dividends. 'Equities' is another sharemarket term for shares, again, representing part-ownership of a business.
For example, you may wish to finance the expansion of your business by selling 25 per cent of your existing business to an investor. If your business was valued at $1 million, selling 25 per cent would provide you with $250,000 of capital to fund your expansion. However, the investor would be entitled to 25 per cent of your profit.
Shares enable the established business to raise capital. This can be done privately, or by listing the company publicly on the stock exchange, and inviting financial participation. An Australian Stock Exchange (ASX) public share float is suitable for the large, established company that can manage the cost of setting up a successful float, and listing the company.
The National Stock Exchange of Australia specifically lists small and medium businesses and may be an appropriate avenue for a small business to raise capital.
Tip: For more information on equity investment explore the National Stock Exchange of Australia listing.