Choosing the right finance

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Without the right finance in place, you could find yourself missing out on growth opportunities or compromising on quality. Worst of all, you could run out of cash.

What is the difference between debt versus equity finance?

	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	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. 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 you borrowed. In most cases, you will need to offer security for your loan.	You share ownership of your business so if it’s successful, a share of that success goes to someone else. You may lose control of your business. Your investor may take part in decision marking and take a share of each year's 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.

 

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 life of 10 years, take out a 10-year loan and make repayments out of the extra income you earn from that press.

 

When you need to:	Solutions:	What you need:
Improve cash flow or get extra cash in the short term	Short term finance and purchasing solutions	Business Credit Card Bank Guarantee Overdraft
Grow your business over the longer term	Long-term finance	Business Line of credit BetterBusiness Loan
Buy vehicles and assets		BetterBusiness Loan Car and Equipment Finance

 

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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 be taking 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 that 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.

Sources of equity finance

Family and friends	Many business owners approach family and friends to raise finance. While loved ones may give more generous terms 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.
Business partner	When taking on a 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 as well.   Typically, they’ll invest anything 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, 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 a return of 35% p.a 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 relatively 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

• Australian Private Equity and Venture Capital Association

 

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• 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).