Exceptional Magazine : 2012 Exceptional Magazine
Exceptional Australia 2012 41 Choosing how to fund a business is a trade-off between keeping control and deciding how quickly it should grow. Cash fow If keeping complete control is important, the best way to fund a business is through the cash fow it generates. Many businesses do this to avoid both debt and the need to introduce investors. It is also the cheapest form of funding and is an area where even larger companies focus their attention. They do this by improving their cash fow through more favourable terms with suppliers, faster payments from customers and the sale of non-core assets. Making these improvements is good business practice, it also minimises the need for debt or equity. However, improved cash fow, while effective in the short term, may not be enough for most businesses to fund larger and longer term investments or to allow the business to take advantage of 'once in a lifetime' opportunities. Bank debt Many fast-growing or medium-sized businesses need to borrow to fund growth. As a result of the fnancial crisis and the issues in European markets, bank funding costs have increased, making bank debt more diffcult to obtain and increasingly expensive. Banks are more focused on risk and want to lend to lower risk, well-managed companies. How much a business is charged by the bank and how much the bank will lend depends on the ability of the business to convince them that it is low risk and it can repay the loan. To prove this they will require regular updates and security such as directors' guarantees and properties. Some business owners feel that the increased reporting requirements and levels of security have a hidden cost and that control of their business has effectively passed to the bank. For others this only happens if the business fails to meet its targets. Advantages • Access to capital without surrendering control • Not intrusive if facilities are serviced • All proft after tax is retained by the company (bank return is limited to interest rate and fees) • Ability to change providers if you're unhappy with the price or terms as there are multiple providers operating in a competitive market • Establishing a relationship with the banks Disadvantages • Fixed cost --- bank interest, unlike dividends, is still payable irrespective of performance • Banks will become intrusive if things don't go as planned Other types of debt One way of limiting the amount of security provided is to use 'asset backed funding' such as leasing, factoring and invoice discounting. This type of debt is usually more expensive but can be the only option for fast-growth companies with limited additional security. Selling some equity Why would an entrepreneur consider selling part of their business? The theory is that the introduction of new equity will help the business to grow at a faster rate and therefore the remaining equity in the business will become more valuable. An equity injection (like bank debt) gives instant access to growth capital. For unlisted companies equity is usually sourced from private equity frms but there are also other sources to consider, such as private family money or angel investors.
2011 Exceptional Magazine
2013 Exceptional Magazine