Find what funding's on offer for your small business
On the funding trail
According to the federal Office of the Chief Economist’s Australian Innovation System Report 2015, which analyses the economic and policy settings driving entrepreneurial activity, the greatest barrier to innovation for all small-to-medium enterprises (SMEs) aged up to four years is lack of access to additional funds.
Financing woes can prevent start-ups from investing in innovation, commercialising ideas, covering working capital requirements and meeting market demand.
Reflecting the fragmented market for small business finance, the report found that most early-stage businesses do not seek external finance as their major source of funds. Instead they draw on personal savings (72 per cent for start-ups and 51 per cent for young businesses); personal credit cards (21 per cent for start-ups and 19 per cent for young businesses) and founders’ personally secured bank loans (12 per cent for start-ups and 11 per cent for young businesses).
Where to find funding for your small business
- GrantFinder: Grants and assistance programs available for businesses from federal, state, territory and local governments
- Australian Small Business Commissioner
- Government grants and financial assistance available to business
- Peer-to-peer lenders
- Australian Angel Investment Network
Don’t bet the house
The latest SME Growth Index from Scottish Pacific Business Finance found that 65.4 per cent of SMEs in Australia favour or resort to personal finances (including credit cards) to support business growth.
Scottish Pacific chief executive Peter Langham says the use of credit cards with their high interest rates – a common form of funding for businesses – poses important concerns for business viability. “How SMEs are funded has a significant bearing on operations, from how well they can manage cash flow to the pace at which they can expand,” Langham says. “It’s crucial to get it right and not think too short term.”
The appeal of personal finance includes convenience, speed and accessibility but, he says, “the downside is that higher-than-necessary funding costs cut directly into margins and personal financing can leave owners open to family conflict that can destabilise the business.”
Begin with the bank
For most small businesses, the bank will be the first port of call. But as banks move away from traditional relationship banking models to risk-based assessment where your application is judged against a fixed set of criteria, approaching your bank won’t always deliver the anticipated outcome.
Many businesses won’t apply for a bank loan until they are ready to expand, by which time the business may be several years old. Unfortunately, a steady banking record is not always good enough to snare that loan because your bank may not know enough about your business to make an accurate credit assessment. SMEs can bridge this gap by producing business plans and detailed performance reports from day one rather than trying to scramble together documentation when applying for a loan. It’s worth having this done professionally by an accountant or business adviser.
Take the time to shop around. Lenders do differentiate on price and some businesses can pay below standard rates. That’s when those business plans and performance data will come in handy. Insist that your application for funding be assessed by a business lending specialist rather than a personal loans officer.
Snapshots from a recent Scottish Pacific survey of Australian and New Zealand SMEs
- SMEs intending to use their own funds to finance growth has increased from 81.1 per cent to 92.7 per cent since September 2014.
- 67.9 per cent of SMEs are willing to pay a higher rate to obtain finance if it means they don’t have to provide real estate security.
- The biggest barriers to success are high or multiple taxes (62.7 per cent), conditions of credit (62 per cent) and red tape (56.5 per cent).
- Willingness to merge with another business as a strategy for growth has almost doubled since September 2014, from 6 per cent to 11.3 per cent of SMEs.
- The proportion of businesses looking to non-bank lending has increased from 13.6 per cent to 16.4 per cent in the past year.
Send me an angel
“Business angel” investors, private-equity firms, and venture-capital firms, are funding options for growth companies with potential for expansion, particularly in the technology, bioscience and innovation-based sectors. You can find these through industry associations and online forums, and through advisers such as lawyers and accountants.
You may need to cede some equity in your business to investors as well as seats on the board (which in some cases will mean establishing a board and governance protocols), and occasionally management input, but it’s all about the big picture.
Relatively new in Australia, peer-to-peer lenders, also known as marketplace lenders, operate by connecting investors with business borrowers. According to a list published late last year by Canstar, up to eight peer-to-peer lenders are now giving SMEs the opportunity to apply for business loans, with some companies lending up to $2 million while others set the limit at $35,000.
These funding sources are only growing, giving businesses a wider range to choose from. Of course it’s always important to do your homework as there may also be hidden costs.
Business-to-business channels General Manager at credit reporting agency Veda, Moses Samaha, believes the latest Veda Quarterly Business Credit Demand Index (December 2015 quarter) shows a strong appetite for credit, which bodes well for the Australian economy.
Samaha also urges small businesses not to write off banks as a source of finance. “Small business lending is the new battleground for the banks,” he says. “So don’t be afraid to step inside and shop around. If you have a good business they will lend to you.”