5 Top Funding Methods for Entrepreneurs in Australia
Do you have a dream to pursue a new business venture? Not sure how to finance your business? You can stop dreaming and begin planning. Budding entrepreneurs have numerous funding options available to them. You can check out five strategies to fund your business below.
The easiest, most popular form of funding a new business is by dipping into your personal savings. According to Intuit QuickBooks' Funding Down Under: A Look at Small Business Funding, 72% of individuals founding a new business utilise their own personal funds.
The perks of this method is the fact that:
- No paperwork required.
- No review process that could decline your funding.
- No potential interest.
The only real downside is that you will be cutting into your rainy day funds. I would recommend that if you do utilise this method, you don't empty your bank account entirely. If possible, you should have enough money remaining in the account to deal with any potential emergencies.
Credit cards are the second most common means that Australian entrepreneurs fund their start-ups. Credit cards can be an easy means for small businesses to make necessary purchases that they won't have the funds to cover immediately.
Due to the fact that average credit interest rates are currently 17.28%, I would recommend you try not to rely too heavily on this method for purchases you won't be able to pay back fairly quickly. The only exception is if you can get your hands on a credit card that offers a long 0% APR promotional period.
If you do plan to use a credit card a lot, you might want to look into applying for a business credit card. Business credit cards typically have:
- Higher credit limits.
- Company liability protection that covers any cases of fraud.
- The potential tax deductions on money spent with card.
- The ability to help you build business credit.
- A business geared rewards program.
At the end of the day, credit cards are handy to have to build credit and act as a monetary safety net. Personal or business, if you don't already have one, you might want to apply for one.
Government grants, if sought after and granted, can provide significant aid to start-ups. A grant, for those who don't know is money given to accomplish a particular task that is not required to be repaid. That can be a great financial aid to any new entrepreneur.
Although, only 2% of Australian businesses successfully utilised grants as a funding strategy, any new business owner should spend at least a little time reviewing what grants their business venture might be eligible for. If you never apply, you will never have the chance to be one of the businesses that do successfully receive funding.
Here are a few resources to locate potential grants:
If you do decide to apply for grants, you will need to write a fairly in-depth grant application. The grant applications should:
- Meet and not exceed required word count range for the application.
- Cover every point required.
- Explain how much funding is being sought
- Explain what the money will be utilised to purchase
- Explain how funding the grant will help the business or the community.
In general, the more you can contextual funding the venture as a means to aid the community, the better your chance is to have the application accepted. For more tips on writing a grant application, you can click here.
Loans are another common option to finance a business. Loans are typically sums of money that are borrowed by an individual or business. There are a two different types of professional loans you can pursue as a new business owner: personal loans or business loans. You can check out the difference between the types of loans here.
The individual who pursues a loan usually agrees to pay interest on the sum and adhere to a payment plan. In order to receive lower interest, individuals might have to secure the loan with personal or business assets. When you secure the loan, you essentially grant them permission to seize the asset if you default on the loan.
When you approach the lender, you should have well-developed written business plan prepared. If you're a little unsure of your ability to navigate how to pursue a loan, you might want to consider consulting a mortgage broker.
If you're not quite at the stage where you can be granted a bank loan (or you want to try to forgo paying interest rates), you might consider approaching family and friends about potentially loaning you money to start the business. If you do take this approach, you really should still approach the individuals with a concrete business plan to ensure you can give them their money back.
Equity investment, like grants, allow business owners to acquire funding without racking up debt. Through the equity investment process, investors give a certain amount of money to a business in exchange for an equivalent percentage of stock in the company. The investor does receive a percentage of the company's profits (based on the number of shares in the company).
It's important when you do engage in equity investment that you don't sell off too much of your company. (You can use this Equity Investment Calculator to help you with that process.)
If you don't necessarily want to dilute ownership of your company through this method, you could try to make the stock callable. Callable stock allows the business owners to re-purchase the stock from an investor at a set date and price.
There are a few different types of investors you can consider:
- Family and friends.
- Angel investors.
- Venture capital firms
Equity investments are a tad harder to receive than loans. Loans grant the lender a means to recoup at least part of their money. Equity investors might not receive any of their investment back depending on the state of a company when it goes under.
You need to go to any investors with a very thorough explanation of why they should invest in your company. And if they do opt to invest, you should (even if the investor is family) have both parties sign an investment contract. (You can find investment contract templates here).
Starting a small business can be an exciting, complicated, and expensive endeavor. Once you have your start-up funding handled, you will still have a long road to success. You can check out She Inspires free business ebooks for additional small business advice.