Accessing growth capital is one of the great hurdles of the business world. One of the main issues small and medium size business owners face is limited access to financing to help their business continue to succeed and grow.
Despite sometimes having over 10 years of profitable results, long term customers and stable revenue, financial institutions can remain wary of lending money to business owners. They can place heavy restrictions and high interest rates to cover their perceived risk.
If you are seeking growth capital for your business, contact Nash Advisory. Our expert team can offer you qualified advice on how to grow your business at any stage.
Growth phases
All businesses undergo multiple phases of growth, which generally include:
- Product or service expansion
- Improved market position
- Planning for future growth
Often the business will go through multiple phases in a hopefully upward trajectory. During these phases, access to capital for growth, acquisition or expansion is important in order to keep the momentum going.
Growth in each business stage
There are a handful of sources of capital for growth, but these differ depending on the stage of the business, each of which is detailed below:
Start-up
Traditionally, the only real source of capital at the start-up phase in Australia is friends and family. In recent years Australia has developed an angel investor market for funding, however other than a few industry darlings, the pricing power and influence favours investors.
- Our advice is to save some money up, spend it wisely, and get some customer validation before looking to bring on outside capital.
Rapid growth
During this phase, businesses will be boot strapping cash, being tight with creditors and chasing debtors quickly. Capital sources can be the banks if you guarantee with a property, otherwise friends or wealthy investors.
If the business can become a $100 million company, then the venture capital fund market may be interested in your business, or potentially the IPO market.
- Due to the perceived risk of the venture capital fund market, we would not recommend this for 99% of business owners.
Scaling up
Once your business is making over $2 million in profit, then family offices can be a good source of capital for growth. These organisations are lighter on diligence than other parties, and are prepared to invest small amounts of $2 million and $10 million.
If you require more capital then there are several other choices:
Institutions offering equity seek to invest $10 million equity cheques. They are rigorous and will require high standards for the business
Sometimes banks will lend to assist with growth via debt, especially if the business is backed by assets, like through equipment hire. It is usually the cheapest form of finance.
Australia has a strong IPO market with thousands of listed companies. Unfortunately, most of these companies list and go into a downward share price spiral for many years.
Mezzanine finance usually has strings attached to it and is more costly than a bank. However, if your business is successful, it can be more fruitful for founders to take on mezzanine debt as opposed to equity.
Returns
Family office-style funding will be seeking 15% long term returns, whilst private equity will seek 20%.
Venture capital investors are seeking 20%+ returns with their winning investments delivering 100% returns, and many of the failures delivering full losses – therefore venture capital funding is the most expensive on the market, but are more open to taking risks.
