Finding the money to grow your business

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?

<p><small>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. &nbsp; Let&#39;s look at some of them.</small></p><p><small><font color="#008000"><strong>Family and friends<br /> </strong></font>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.</small><br><br /><small><strong>Benefits: </strong>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.<br /> <strong><br>Drawbacks:</strong> 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. </small></p><p><small><font color="#008000"><strong>Debt financing<br /> </strong></font>Traditionally, businesses have raised money by asking the bank for a loan. To do this, you will need to meet the bank&#39;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&#39;s monthly budget cycle you make your approach can all influence the outcome.<br /><br> <strong>Benefits:</strong> 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.<br><br><strong>Drawbacks: </strong>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. </small></p><p><small><font color="#008000"><strong>Equity financing<br /> </strong></font>The second option open to businesses is equity financing or venture capital. This usually involves giving away a share of the business to an investor or co-owner willing to provide capital. You will need to convince a potential equity financier that investing in your business will provide a worthwhile return on their investment and that potential rewards outweigh any risk of losing their money. They, too, will want to see a proper business plan before deciding to invest, and will want some hands-on involvement in the business or control over the decision-making process.<br /><br><strong>Benefits: </strong>Equity finance provides access to funds without having to take on the risk of losing an asset such as your home. The past few years have seen an increase in investment capital available to businesses in New Zealand. Potentially, venture capitalists or investors can add value to the business by providing a network of contacts and their expertise. A co-owner may also help share the day-to-day workload.<br /><br> <strong>Drawbacks: </strong>Investors will want to see results and have some say in the decision-making process. This can lead to conflict between the original owner and the venture capitalist. Venture capital may be withdrawn from the business when the investor wants to exit, which may not tie in with the original owner&#39;s plans and may even jeopardise the business itself. </small></p><p><small><font color="#008000"><strong>Grants, awards, subsidies and government funding<br /> </strong></font>This type of funding seldom comes without strings attached. It&#39;s often misunderstood but broadly speaking it&#39;s money which home or small businesses can access in the form of grants, awards, subsidies or, perhaps, low-interest loans and is typically part of a government or occasionally special-interest private initiative. Criteria are fairly rigid, and usually relate to innovation, technology, belonging to a specific demographic group, or long-term unemployment. In many cases, too, this funding is contestable - meaning you will need to prove you deserve it more than other businesses which may be applying for money from the same, limited, source. Many government grants are for a proportion of the cost of an eligible project, and in most cases businesses are expected to contribute their portion in cash though in some instances the criteria for application allow in-kind contributions provided a reasonable and accurate dollar value can be attached to this. In addition to these sources of funding, there are a variety of sources of low-interest loans or organisations willing to advance money to those who meet certain criteria and have had applications for commercially available finance turned down by lending institutions.</p><p>Whatever funding you are applying for, remember that no-one is going to give you money without assessing the risk and looking for some kind of reward. Irrespective of the criteria, it's a business proposition, and there has to be a win-win in order for it to work. Be professional in your application, think about what might appeal to whoever is making the funding available, and remember you will have to give to get. Securing the right funding can make a big difference to your business. Work out what your options are, and the pros and cons of each, before taking the leap.</p>


  • Capital
  • Finance

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Heather Douglas's picture

I started Bizbuzz (or HomebizBuzz as it was called then) in 2000, when I worked from home and realised there was nowhere for home businesses to find relevant information, nor a community of like-minded people to tap into for support, or just a chat. A few years later, Smallbizbuzz was born, and...