Raising investment is one of the foremost challenges that early-stage start-ups face. While there are many ways to raise investment, the funding type that you choose depends on many factors including your business structure, industry, the products and services you offer, your repayment capacity and much more.
Before you raise investment for your business, an in-depth understanding of finances and cash flow is critical. Preparing the cash flow statement can give you an overview of your current income, expenses, net profit and future projections.
Evaluating your ability to repay the loan you may borrow and knowing your financial limits are equally important to have clarity on how much capital you need to raise. Carefully consider:
- Whether you need the money as a lump sum or on an as-needed basis
- The maximum repayment that you can afford
- The assets that you can offer as collateral if needed
- Whether a loan guarantor is available
- The amount of equity you have
- Percentage share that you can offer to investors
Funding options for Australian start-ups
Here are the funding options available for start-ups:
Venture capital funding is one of the most popular ways to raise investment in Australia. In 2019, venture capital investments amounted to $180million in the manufacturing sector. Healthcare, services, retail and wholesale trade were the other sectors that received more than $100 million worth of venture capital funding (Statista, n.d.). In 2019, a record level of venture capital funding was witnessed with about $1.7billion being invested in start-ups in Australia (Australian Financial Review, 2020).
Venture capital funding is where corporates, super funds or individuals with high-net-worth invest in start-ups while receiving equity stakes in the invested business. Typically venture capitalists do not invest their own money but manage others pooled money.
These investors look for businesses with high growth potential and many have their own niche areas. The Australian Government also has many venture capital programs that are designed to help innovative businesses make their mark.
Angel investors are individuals who are high-net-worth and invest their own money in a business concept that interests them. These investors look to contribute to the success of the start-up with their knowledge, skills and contacts. While many start-ups are funded by a single angel investor, there are also angel groups.
A bootstrapped business is when the entrepreneur digs into their savings and the business is sustained by the revenue it earns. While this can restrict the amount of cash available, it also means business owners who are bootstrappers are free to make their own decisions.
Bootstrapping successfully for the initial period can leave you with more equity while maximising the potential to obtain more funding when required.
You can also consider borrowing from friends and family however, issues of money or capital can complicate personal relationships. It is important to ensure the paperwork is professionally drawn up while expectations and legal issues are adequately addressed.
Business loans and line of credit
Business loans vary depending on the loan term, amount, interest rate, fees as well as security. It is important to evaluate the product disclosure information before applying for any type of loan.
Overdraft facility provides you with a defined overdraft limit from your business account and is one of the ways to raise working capital for your start-up. Line of credit is also a type of loan that offers access to funds up to a defined limit. A bill of exchange or Commercial bill is a type of loan that meets short-term funding requirements. Debtors finance or factoring is when a company purchases your outstanding invoices and chases up debts.
Why do business owners need public liability insurance?
Business owners can face claims related to:
- Injury or death of clients/third parties due to negligent business services or activities
- Damage to client’s property because of negligent business activities
The legal costs related to fighting these claims and the incurred compensation can place a huge dent on your finances. When you are not at fault, these claims can damage your reputation.
One of the smart ways to streamline your investment is to cover yourself against various business risks with Public Liability insurance.
This type of insurance is not only mandatory for Australian businesses but provides comprehensive protection in case of an injury or property damage suffered by third parties on your business premises or as a result of your professional services.
Public Liability insurance typically includes Product Liability insurance which protects against damage or injury caused by any of the products associated with your business.
Check this article to know more about what the public liability insurance covers and why self-employed workers need to purchase this type of insurance.
- Statista. (n.d.). Australia – venture capital investments by sector 2019. [online] Available at: https://www.statista.com/statistics/1039256/australia-venture-capital-investments-by-sector/ [Accessed 26 Aug. 2020].
- Australian Financial Review. (2020). Australia hits record level of VC funding. [online] Available at: https://www.afr.com/technology/australia-hits-record-level-of-vc-funding-20200128-p53vcs [Accessed 26 Aug. 2020].
- SmartCompany. (2019). The complete guide to startup capital: 12 ways to fund a new venture in Australia. [online] Available at: https://www.smartcompany.com.au/startupsmart/advice/startup-capital-guide/.