Financing growth

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

• Debt versus equity
• Debt finance
• Choosing the right finance tool
• Equity finance
• Sources of equity finance
• Find out more

 

Debt versus equity

	Debt finance	Equity finance
What is it?	You borrow the money from the bank (or someone else).	An investor buys a stake in your business.
Pros	You retain complete ownership of your business and its profits. Interest payments are generally tax deductible.	The investor shares your risk. If the business fails, there’s no need to pay them back. There are no interest payments but you may need to pay an investor a share of profits, which could be more than interest.
Cons	You have to pay interest on your borrowings. You have to repay the amount borrowed. In most cases, you'll 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, a share of that success goes to someone else. You lose control of your business e.g. an investor may take part in decision making. Your investor may take a share of profits.

Debt finance
Your bank can offer borrowing options. The trick is to choose the right tool for the right purpose — short-term cash flow borrowings for day-to-day working capital, and longer term options for buying assets.

If you’re buying an asset, match the length of the loan to the life of the asset you’re buying so it can pay for itself over time out of the extra cash flow it generates. For example, if you’re a printer buying a printing press with a useful life of 10 years, take out a 10-year loan and make repayments out of the extra income you earn from that press.

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Choosing the right finance tool

Purpose	Options
Short-term cash flow	Receivables finance Overdraft Business Credit Card
Long-term finance	Line of credit Business Loan
Buying assets	Business Loan   Equipment and Technology Finance   Car Finance

Equity finance
Finding the right equity partner can take time. Depending on the kind of investor you choose and the agreement you reach, they could take a very active role in the future of your business — so it’s important to find someone whose outlook and aspirations match yours.

Ideally, your equity partner should have skills and experience that extend and complement yours, so they are an asset to your business in more ways than one. They may also be able to introduce you to a network of contacts that can open up new opportunities for you and your business.

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Sources of equity finance

• Family and friends
  Many business owners approach family and friends to look for finance. Although terms may be generous, this option is not for the faint-hearted. You'll have to disclose business details, and if something goes wrong and their investment is lost, it can damage relationships. This is unlikely to be a good option if you're looking to raise large amounts (more than $500,000, say).
  
  
• Business partner
  When taking on a partner, you need to be confident you can work together long term. You must have a written partnership agreement setting out how disputes will be settled and what happens if a partner wishes 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 also be invaluable as mentors and advisers.
  Typically, they’ll invest up to $2m. They’ll be on the lookout for businesses with exceptional growth prospects, so you’ll need to demonstrate your potential.
  
  
• Venture capital
  Venture capitalists 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, either on the share market or to someone else.
  A venture capitalist will typically seek to exit your business in three to five years with returns of 35% p.a. or more so you’ll need to have strong growth prospects. Generally they’ll look to invest between $2m and $10m, depending on your business and its potential.
  
  
• Private equity
  Private equity investors focus on larger businesses. They’re often involved in management buyouts using borrowed funds. They aim to realise a large return in a relatively short time frame, covering their cost of funds and compensating them for their risk. Private equity investors can give you access to amounts of $2m to $10m plus. If you need a large amount of capital, they could be the right people to talk to.

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Find out more

• Australian Private Equity and Venture Capital Association  

 

• 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).