10 Financing Options For Small Businesses

Small businesses have a humble beginning before they venture into scaling up. They start with funds acquired through loans and grants to realise their business ideas. Many founders cannot secure these loans because of a lack of a concrete plan or a low probability of success in a cluttered market. They usually have to gather their finances without getting help from external sources. However, this benefits sole traders or home businesses that incur minimal overheads.

Most small businesses need a team and a small set-up with fit-out, which requires a significant income. They also must pay for the equipment, stock, distribution, utilities, commercial leases, etc. Thus, operational and non-operational expenses require regular funding, which is scarce until the business starts making profits. Many entrepreneurs also need financing to expand after accomplishing consistent growth.

So, here are ten financing options for small businesses. These can help accumulate the desired working capital or reinvestment money to boost the venture.

1. Apply for Small Business Loans

New entrepreneurs who wish to launch a start-up or veterans who want to enter new markets need financing. They can apply for a business loan in Australia but must prepare for it by preparing a detailed business plan with realistic financial projections. Also, they must hire an accountant to determine the amount required to meet the business needs and whether it can be repaid without challenges.

Most borrowers need to provide collateral and financial documents to get loan approval. Existing businesses must submit financial reports, bank statements, tax receipts, etc. Borrowers must also choose the loan type they wish to get based on the term, interest payment plan, and taxes.

2. Pitch to Angel Investors

Angel investors are high-net-worth individuals who are veterans in their industry and have the inclination to mentor new business owners. They invest in start-ups in exchange for equity. It gives them an opportunity to generate an exceptional return on investment.

Many seasoned entrepreneurs choose to become angel investors with the amount they receive after they sell business online. It allows them to stay busy during retirement and continue to earn handsomely.  

3. Seek Venture Capital

Venture capital firms create a pool of investors and use their capital to fund start-ups and small businesses in exchange for equity. This financing is easier to get than a loan and includes guidance and support from venture capitalists.

The funding amount is also significant because it comes from a pool of investors. However, increased pressure exists to utilise the funds effectively and demonstrate growth.

4. Acquire Funds From Family

Many business owners prefer getting a loan from a family member to avoid the hassle of paperwork associated with bank loans. However, the financial commitment can become challenging if the loan terms are not clarified initially. The lender must clarify if they are offering a loan or a gift.

If it is a gift, the Australian Taxation Office will not impose taxes on it. However, if it is a loan, the lender and the borrower are liable to pay taxes for the profits and interest earned from the loan amount. Considering it as a loan and documenting the transaction is also helpful when the borrower plans to sell the business online and exit.

5. Opt for Crowdfunding

The digital revolution has created a new avenue for funding small businesses that do not have access to the usual financing options. This method is known as crowdfunding. It involves raising funds for a business online through contributions from many individuals who get rewarded by the founder.

The incentives for the investors can be monetary, such as an equity share in the business or a reward, like a free supply of the product for a year. Some contributions can also be altruistic to support a micro business.

6. Rely on Bootstrapping

Bootstrapping is the process of building a business from the ground up with the entrepreneur’s personal funds. The owner buys the resources for operations without seeking funding from any external source. Thus, the owner uses his credit card and personal loan to start the venture, which can be risky.

These businesses can continue to operate at the owner’s expense and then rely on profits being reinvested. These entrepreneurs can later opt for venture capital when they plan to expand.

7. Check the Stock Market

Business owners can raise capital by offering shares publicly on the stock market. It is known as offering Initial Public Offering (IPO). However, it can be used by established businesses with significant and profitable assets. They have to satisfy the obligations of ASX listing to offer IPOs.

The process requires a significant investment, and the business may be unable to secure the desired funds. Entrepreneurs who leverage this process successfully can easily sell their business online because of its widespread recognition.

8. Take Advantage of Government Grants

Small businesses and start-ups in Australia receive support from the government to continue operating. The business owner must find out the grants that can be secured by their entity by understanding the eligibility. The most lucrative grants include Accelerating Commercialisation. Austrade Landing Pad and Export Market Development Grant.

There are grants offered by state governments and can be access by entrepreneurs operating in that state. In addition, there are industry-specific grants and start-up funding support, such as the CSIRO Kick Start Grant.

9. Ask for Supplier Financing

Many suppliers offer trade credit to business owners, which helps them defer payments for the stock bought. This is a business-to-business loan where the payment for goods is not made upfront but at a later date. Typically, suppliers allow entrepreneurs to pay within a month or quarter. There is no interest associated with this credit type.

Trade credits help businesses maintain positive cash flow and use this financing for short-term growth. Many fintech businesses maintain their growth momentum with the help of this financing. However, accounting becomes more complex with this type of funding.

10. Look for Finance Companies

Finance companies offer loans to small businesses, but they do not work like banks. They earn from the interest received from the borrowers, so they charge a higher interest rate than banks. Entrepreneurs with poor credit scores rely on finance companies to get the funds.

However, they must provide collateral to the lender, which can be lost if the business owner does not pay on the defined dates. Entrepreneurs who wish to sell business online should avoid having their credit score affected as it can reduce the ROI.

Wrapping Up

Financing is a prerequisite for small businesses that need funds to establish themselves in the market. Whether they want to start a new product line or acquire more customers, they need financing. The financing options mentioned above can help them accomplish these goals.