What are some of the avenues available to home and small businesses for raising the necessary finance? What are the benefits and drawbacks of each?
When your business needs money to get off the ground, develop a product, or create a strategic plan, where can you turn? While Kiwi businesses have a reputation for entrepreneurship, innovation and achieving the next-to-impossible on a shoestring budget, there comes a point in the lifecycle of many home or small businesses where, without additional resources, they cannot take the next big step, gain market share or remain competitive. Others may simply need help getting a start-up off the ground. There are several places the necessary money may be found - and there are pros and cons to each. Let's look at some of them.
Family and friends
The first place home and small businesses usually turn for help with finance is to family or friends. After all, these people have a vested interest in seeing the business succeed. Generally, finance from friends and family falls into either debt financing (if you offer to repay their loan) or equity financing (if you offer to share the profits of the business), and experts usually recommend avoiding this option. If you approach friends and family as sources of finance, consider carefully the risk to relationships - and if you are determined to go ahead, discuss what will happen in the event of business failure, set limits and parameters, draw up and discuss a proper business plan and have proper legal documentation drawn up.
Benefits: It is often easier to persuade friends and family to provide finance than it is to secure a bank loan, sell part of the business or secure venture capital. Friends and family may be less pedantic about seeing a proper business plan, or asking for security.
Drawbacks: Friends and family are often not skilled at determining the potential for a business to succeed. While their faith in you in the beginning is flattering, and none of you expect the business to fail, many a relationship has soured over money lent for a business venture.
Traditionally, businesses have raised money by asking the bank for a loan. To do this, you will need to meet the bank's criteria - including proving the viability of your business with a well-substantiated business plan, and providing security for the loan, frequently your home or other substantial asset. The criteria according to which banks decide whether to grant the loan, vary from bank to bank. Factors such as the kind of industry your work in, your personal financial history, and even who you speak to and when in the bank's monthly budget cycle you make your approach can all influence the outcome.
Benefits: If you have a good business plan and can provide the required security, you have a good chance of getting a loan. If at first you are not successful, you can shop around at other banks.
Drawbacks: It is often harder to secure a loan than anticipated, and if you use your home or other large asset for security, there is a risk you could lose it if you are unable to repay the bank loan.