Financing your business

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So you’ve got a fantastic idea for your new business? Just can’t wait to get started? When starting a business, you need to be thinking about money, how much you need and where you’ll get it!
 

You may need some cash to get your business off the ground. Be sure to factor everything in (like your existing financial commitments) to work out what you’ll need. There are several options available to fund your business including grants, loans or even money from your friends and family.

 

Step 1: Create a list of how much money you will need

• How much of your own money you can invest.
• Where you will operate the business and how much that will cost each month. Don’t forget, that even operating from home you will need to cover the additional costs like electricity.
• What equipment you need to buy and how much it will cost.
• How much stock you need to keep on hand and how much it will cost.
• How many staff you will employ. Work out your cost of wages for yourself and your employees, including superannuation contributions.
• If you’re considering a new car or truck list the cost of leasing or buying, registration, servicing and petrol.
• Any expected accounting, legal or marketing costs.

 

Step 2: Find the source, or sources, of finance to suit you

Your own investment:

• Use your own money from savings or investment. But think about what you need to keep in your savings, just in case you need some spare cash.
• Keep another job for a short while to keep an income while testing a business idea.

Seek finance from the Government:

• Grants and assistance programs are available to select new businesses through the Australian Government.

Seek finance from others:

• There are two types of borrowing: Debt finance when you borrow from the bank and Equity finance is when an investor buys a share if your business:
  
  

	Debt finance	Equity finance
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.

 

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• To get the most out of debt finance, use the right option for the right purpose. For example, short-term options for day-to-day working capital and longer term options for buying assets.
  
  

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

 

• Keep in mind that finding the right equity partner can take time. It’s important to find someone whose outlook and aspirations match yours. The types of equity partner include:
  
  

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.

 

To find out more:

• Call us on 13 1998 to meet a Business Banker
• Australian Private Equity and Venture Capital Association
• Australian Government Grants Programs 

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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)