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BetterBusiness

Financing growth

Rapid growth can stretch your resources to the limit. So how do you finance your growth, without growing yourself out of business?


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When your business is growing rapidly, you’re constantly paying out money to buy more stock and supplies, hire new staff, open new premises or buy new equipment. Even with profitable sales, that investment can take time to pay off. The result can be a cash flow crisis that could end your growth story before it’s begun.

 

The trick is to give your business the money it needs to grow, without starving it of current cash flow. The financing options are similar to those you considered when starting your business, so to make sure you choose the right one, why don’t you consider a Business Review.

 

Debt versus equity

 

Debt finance

Equity finance

What is it?

  • You borrow money from a bank (or someone else).
  • An investor buys a stake in your business.

Pros

  • Interest payments are generally tax deductible.
  • You retain complete ownership of your business and its profits.
  • The investor shares your risk so if your business fails, there’s no need to pay them back.
  • No interest payments but you may need to pay an investor a share of profits

Cons

  • You pay interest on your borrowings.
  • You must repay the amount you borrowed.
  • In most cases, you will need to offer security for your loan, so this option is difficult if you don’t have assets.
  • You share ownership of your business so if it’s successful, you share that success.
  • You lose control of your business. Eg: your investor may take part in decision marking.
  • Your investor may share profits.

 

Debt finance

With a wide range of borrowing options available the trick is to use the right option for the right purpose — short-term cash flow borrowings for day-to-day working capital, and longer term options for buying assets.

When you need to:

Solutions:

Grow your business

 

Improve cash flow or get extra cash

Buying vehicles and assets

 

Equity finance

Depending on the kind of investor you choose and the agreement you reach, they could be taking a very active role in the future of your business. It’s important to find someone whose outlook and aspirations match yours and whose skills will complement yours.

 

Sources of equity finance

Family and friends

While loved ones may be more generous than outsiders, this option is not for the faint-hearted. You have to disclose business details to those close to you, and if something goes wrong and they lose their investment, it could damage your relationship. This is unlikely to be a good option if you want to raise large amounts.

Business partner

You need to be very confident that you can work harmoniously together in the long term. It’s essential to have a written partnership agreement setting out how disputes will be settled and what happens if one partner wants to leave the business.

Business angel

Business angels are wealthy individuals looking for fast-growing businesses to invest in. Often experienced business-people, they can be invaluable as mentors and advisers.
Typically, they’ll invest up to $2m. They’re likely to be after businesses with exceptional growth prospects, so you’ll need to demonstrate your potential.

Venture capital

Venture capitalists are professional investors who invest in promising businesses and help them grow, often to the point where they’re ready to be listed on the share market. They make money by selling their share in your business.
A venture capitalist will typically exit your business in three to five years with a return of 35% pa or more. Generally they’ll look to invest between $2m and $10m, depending on your business.

Private equity

Private equity investors have an emphasis on larger businesses. They’re often involved in management buyouts using borrowed funds. They aim to realise a large return in a short time frame, allowing them to cover their cost of funds and compensating them for their risk. Private equity investors can give you access to amounts of $2m to $10m plus.

 

Find out more

 


  • Important information 
    As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).

 



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    Rob Szymanski

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