Business Basics - Financing your growing business

When it comes to starting a business or growing a small company, business financing is an option many entrepreneurs and business owners need to take to fund their growth. Business finance helps start-ups and SMEs to start, grow, and increase their ability to expand.

Is business financing an issue for you? As with all things business, it is essential you talk with industry experts to ensure you make informed decisions. Contact Engine Room Chartered Accountants today on in Pukekohe or Tauranga for a no obligation consultation.

 

What is Business Financing?

In order to carry out their operations, business often need external finance. Growing businesses tend to consume more cash than they generate in the short term. Business financing is the process of filling that gap.  Raising money for your business comes in many different shapes and sizes — some will fit your needs more than others. Whether it is asset funding or operational funding you require, consideration needs to be given to what works best for your business.

 

Types of Business Financing

If you are a start-up your first financing step is known as ‘seed capital’ or ‘seed funding’. You are looking for money to plant the seed that is your business. Every other financing step after this is known as a ‘funding round’.

Seed capital can come from a variety of sources such as a bank loan, crowdfunding, angel investment, grants, or money raised through family and friends, though in the first instance this tends to be your own savings.

For very early stage start-ups we often see the founder working in paid employment, while building the business in their spare time.

Raising seed capital is often a riskier investment for those willing to lend you money (such as angel investors) and this is reflected in the amount of equity they require of your business.

If you are already in business and are making money, this shows that the company is profitable or at least has a market for your product or service,  and therefore isn’t such a risky investment. The lower risk will mean more favourable equity demands or interest rates.

Let’s take a closer look into 5 ways you can finance your business in New Zealand.

 

5 Ways to Finance Your New Zealand Business

 When it comes to financing your business there are many options to consider. However, as with anything in business, you should seek professional advice as to the best course of action you should take.

Here are 5 ways you can finance your New Zealand business:

Bank Loans 

Before borrowing money from a bank, you should ask yourself if you can afford to make the repayments. If you don’t think you will be able to pay back the loan and make the repayments, then you should look to only borrow what you can afford to pay.

Although a bank loan is a popular way for many business owners to grow their companies, it doesn’t mean is it the right decision for you.

Consider a bank loan if:

  • You are confident you can make the repayments,
  • are likely to pay it off early and reduce the amount of interest accrued,
  • need the money to grow rather than to pay off debts,
  • you fully understand the terms and conditions.

To help you understand the amount you will have to pay, check out this debt calculator.

Occasionally we hear of business owners who are advised to get a loan because it is tax deductible.  This type of advice should be treated with scepticism!

Your bank will require you to provide up to date financial reports, financial forecasts and for new business, a full business plan.

Contact Engine Room Chartered Accountants in Auckland and Tauranga for unbiased advice on whether a bank loan is right for your financial situation by calling 0800 236 446.

 

Crowdfunding 

Online investment networks known as ‘crowdfunding’ have become popular over the last few years, and New Zealand sites such as PledgeMe and Snowball Effect have helped many entrepreneurs raise the money needed to start their businesses.

The idea of crowdfunding is simple, you set a goal (the amount you need to start or grow your business) with a time limit and interested parties pledge money to help you reach that milestone.

Crowdfunding was first designed to help entrepreneurs create relatively low-cost goods whereby people would pledge the minimum amount to receive the product once it was creating.

However, more and more startups are turning to crowdfunding platforms for larger amounts of money and the investor’s terms can reflect that.

 

Angel Investors

If you are seeking larger amounts of money in order to gror your business then approaching an angel investor network may be the right option for you to take.

The advantage of approaching an angel investor rather than opting for a bank loan or crowdfunding is that the angel investor will often want to take a hands-on approach to your business and offer their specific skills in helping your business start, grow, and succeed.

An angel investor is typically well connected, and they can use their extensive network to help increase your business’s chances of success.

However, angel investors are shrewd business experts and they will often require a large slice of your business along with other terms.

If you are considering angel investment to start your business, you should understand how the whole process works.

The New Zealand Investment Network is an angel investment network that has connected countless investors with New Zealand businesses.

 

“Our angel investors are often experienced in their own sector of business and wish to connect with New Zealand entrepreneurs in similar sectors, or nearby locations.

With thousands of private investors listed upon our network, in a wide selection of business sectors, entrepreneurs are easily able to connect with their angel investor and negotiate terms of investments.”

 

Click here to read how it works and use this as a good place to start when considering angel investment. 

 

Venture Capitalist

A venture capitalist is a high net worth individual or investment entity, that invests in start-up ventures or small companies that wish to grow. A venture capitalist (VC) differs from an angel investor by the amount of money they are willing to invest. Typically, a group of angel investors might invest no more than $1m, whereas VCs would rarely invest less than $1m. 

VCs tend to make their money when you sell your business so it is important that you share the same goals for your business.

When approaching venture capitalists (or other private investors for that matter) you should ensure that your financial statements and forecasts are up to scratch.

Contact the financial experts and Engine Room Charted Accountants today on 0800 236 446 to ensure your numbers are accurate.

 

Family & Friends 

Approaching family and friends to ask for money can be an awkward experience for many entrepreneurs and small business owners, but it is often the best and cheapest place to start.

If your startup idea is viable or if you need a little extra capital to help grow your existing business, then asking your contacts for money will help to make this conversation a little easier.

In fact, one of the first questions an angel investor or VC will ask you is “how much money have you invested yourself?” and “how much money have your raised from your contacts?”. They ask these questions to see how serious you are about making the business work, and this also helps them gauge what others think about your idea.

If you haven’t invested your own money or can’t raise funds from those closest to you then why should a stranger part with their money?

You should make your friends and family aware of the risks as well as the potential gains and provide enough information for them to make an informed decision. Consider what return they will receive should your business be successful.

 

Choose Engine Room Chartered Accountants in Auckland & Tauranga

At Engine Room Chartered Accountants we are a group of financial experts that are here to help start-ups and SMEs across New Zealand reach their optimal best. We believe businesses just like yours are the backbone of a strong New Zealand economy and our aim is to help you reach your financial goals sooner.

Contact Engine Room Chartered Accountants today or call our Auckland office (based in Pukekohe) on 09 238 5939 or our Tauranga office on 07 579 5011.