What is business finance and how to obtain it
What is business finance?
Business finance is money or credit secured to fund your business expenses. While finance is often associated with investors, it can come from loans, credit cards, grants or crowdfunding.
How does business financing work?
Business financing works in several ways. Business loans, whether through a bank or non-bank lender, generally have a limited term and must be paid back. Finance through an investor may not need to be paid back in cash but will usually come with other conditions. The investor may take a share in the business, for example. Grants from government entities or other funding bodies can also be a useful source of finance, if you meet the application criteria.
Identifying your business funding needs
First, identify your business funding needs to decide what you're trying to achieve. Then, calculate your financial needs based on those goals. You should consider:
Projected costs for running your business
These include staff, equipment, rental, manufacturing or import costs, marketing, insurance and software.
Potential growth costs
If you plan to expand, consider what that'll mean for your expenses — think about property, rent, staffing, inventory, and manufacturing capacity, as applicable.
Potential returns
Is finance worth the risk? Outside finance comes with risks and costs, so it needs to be worthwhile. Consider how it could increase your business profitability and growth.
Business funding solutions
Business funding solutions fall into three categories: investors, loans and grants. Here's a look at the pros and cons of each funding type:
Investments
Finance through an investor, sometimes called equity finance, involves funding in exchange for part of your business. An outside investor agrees to provide you with a certain amount of capital, and you give them some form of equity — part ownership, shares or a percentage of profits over time.
While investors can be an effective way to finance a growing company — and some offer expert advice as well as funds — this form of finance isn't for everyone. Some investors may want a say in day-to-day operations and decision-making, while others may ask for a significant chunk of your profits before investing. Before you decide to work with an investor, make sure the trade-offs are worthwhile.
Business loans
A business loan is another way to fund your start-up or fast-growing business. ABN loans are business loans provided by a range of lenders, available to holders of ABNs and can include favourable terms and tax incentives for your Australian-based business.
Types of loans include:
Secured loans require some form of collateral from you, for example, property or vehicles.
Unsecured loans don’t require collateral and are approved based on your credit history.
Revolving credit lets you borrow up to a set amount during the loan term, giving you flexibility in how much you borrow.
Peer-to-peer (P2P) loans let you borrow from investors rather than banks or other lenders. Usually managed by a finance provider, the system lets investors pick the businesses they want to fund.
Crowdfunding
Crowdfunding is a more recent type of business finance popularised by sites like Kickstarter. This type of funding works best for businesses with an innovative new product or service and a solid promotional campaign. Because crowdfunding relies on a large number of individuals choosing to donate, there's always a risk that you won't get the funds you need.
Grants
A grant is money given to your business by a government entity, another business, a charity or non-profit, or a philanthropist. Unlike loans, you don't usually have to repay grants.
How to choose a finance provider for your business
Choosing a finance provider should be as much about you approving them as it's about them approving your loan. No single provider fits every business — it's about finding a lender you feel comfortable working with that meets your business needs. Factors to consider:
Reputation
Is the lender well-regarded and reputable? To find out, read online reviews, talk to other businesses that have worked with the lender, and check that the company has an Australian financial services (AFS) licence.
Fees and rates
Interest rates are always a factor in your loan choice, but it's also important to consider loan fees. Some lenders charge very high fees, which can increase the overall cost of your loan.
Loan structure
Does the provider offer the type of loan structure you need? Some lenders only offer certain loans, which may not work for your situation.
Questions to ask when requesting finance
When you're applying for finance, it's vital to ask the right questions. The more you know about your loan and the repayment terms, the better prepared you'll be. Asking key questions can also help you identify red flags or potential loan issues that could make you seek another provider. Here's what to ask:
What are your interest rates?
Look for rates that are competitive in your area and industry.
What are the repayment terms?
This helps you determine whether your loan is flexible — can you repay early or extend if needed?
What will I need to apply?
You may need to supply critical documents, financial records and a business plan.
How long does the approval process take?
While some lenders will release funds within a few hours, others may take days or weeks.
How do I access my funds?
Depending on the lender and the structure of your loan, you may get a lump sum paid into a nominated account or a card that you can use to access your revolving credit account.
What happens if I can't make repayments?
If you fail to make a repayment, the lender may impose extra fines, or ask that you repay the total amount immediately, or take legal action. If your loan is secured with collateral — like property or other assets – these could be sold to reclaim the funds.
Putting together a plan and gaining funding
When you apply for finance, you may need to provide a business plan. This document includes essential details about your business, including your USP, market research, marketing strategy and projected financial performance. It's a way to show potential investors or lenders that your business is credible, that you know what you're doing, and that you'll put your funding to good use. Getting your head around your business plan is essential when preparing to apply for funding, and with business management software, you can accelerate the lending process by having the financial data you need to hand. Key financial details you may need include:
Performance
A summary of your financial performance to date will include factors like cash flow, profitability, assets and liabilities. Of course, if your business is yet to launch, you won't be able to provide this information but will rely on your business plan.
Forecasts
Projected financial forecast statements for the next 1–3 years, including estimated sales, expenses, monthly cash flow and net profit/loss.
Finance requirements
Be clear about the amount of money you need, your plans for its use, and your repayment timeline.
Equity plans
While it can be hard to plan years into the future, investors will want to know how they'll get a return on their investment. Do you plan to go public with the business eventually so they can buy shares? Will you sell the company at some point?
Business finance FAQs
What are the best types of business finance?
The best type of business finance depends on your funding needs, the stage of your business, and your financial circumstances. Self-funding works for some business owners, working with an outside investor is an option if you're prepared to give up shares or control of your business, and loans are a flexible choice used by many would-be business owners. If your business is eligible for government or non-profit grants, which usually don't need to be repaid, that's even better.
How do you finance a start-up business?
Three main strategies for financing a start-up are self-funding, loans or investors. As with any business, the best type of funding for your start-up depends on your financial situation, business goals, financial needs and the scope of your start-up.
What are the most affordable forms of business financing?
The most affordable form of business financing, in the long term, is usually borrowing. While taking on debt can be risky, it's generally cheaper than handing over equity to investors.
Can I get business finance if I have bad credit?
You can get business finance if you've bad personal credit, but it may be more difficult. For example, you may need to work with a non-bank lender, secure your loan or take a loan with a higher interest rate.
You sort finance, we'll sort financials
Getting finance can be one of the most challenging parts of starting a business. It involves delving into your goals, strategies and financial projections and convincing outsiders that your business idea has potential.
Consistent financial records are a crucial part of applying for funding — and that's where MYOB comes in. Our accounting software gives business owners a central point for financial management, record-keeping and built-in forecasting tools to help project future performance and strengthen business plans. If you're ready for funding to scale up your business or bring an innovative idea to life, MYOB should be part of the plan.
Need to get your financials organised? Get your free trial today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.