Financing your business

Small business finance & accounting

With COVID restrictions affecting business cash flow, this presentation looks at different ways you can finance your business.

Including:

  • Internal
  • External
  • Financial Institutions
  • Government (Grant Funding)
  • Angel Investors
  • Crowd Funding
  • ESIC Investment
  • More

Please note: the content in this module is presented by industry professionals, and designed to raise awareness and develop basic knowledge. If you are looking to take any significant action for your business we recommend speaking with a professional so they can offer advice specific to your circumstance.

Video Presentation: Financing your business

Financing Your Business

Hello, and welcome to the financing your business video. I'm Shaun Reeves.

Hello, I'm Shaun Reeves, director of SRJ Walker Wayland. We're a business advisory accounting, tax and audit firm, to name but a few things, we're proudly parochial in the Moreton Bay Region. I myself have operated in this region as SRJ in various forms for the last 27 years. I'm a chartered accountant, a business advisor, as I said, a parochial Moreton Bay resident, community member, husband, father of five, grandfather of two, and still going strong.

We're here to talk about financing your business. At the moment, given the COVID restrictions, plenty of businesses are under some significant financial distress. So there's no better time to have a talk about funding your business. Traditional sources like regular cashflow, banks, equity funding are all a little bit challenged. I'll go through that a little bit later on in the video, but I want to have a broad cross section of discussion around all of the different ways that we can finance our business. And I'll include internal sources of finance related investors, external type parties, approaching financial institutions, how governments may be able to help from time to time. I'll also spend a little bit of time on some of the growth and startup funding and talk about angel investors, crowd funding, equity, crowd funding, ESIC investment type arrangements, some venture capital. And, and then at the end, I'll have a look at some of the specific COVID related stimulus funding that we need to be aware of to make sure that we're doing the best that we can for our business in, in some pretty tough times.

What are the reasons for somebody to fund your business

I guess the first question is why would somebody want to fund my business? There are a number of reasons that somebody would fund a business, but they're all around return on investment. So if someone is going to assist your business, if you are going to put money into your business, it's all about getting that return on investment.

The return on investment varies for different people. If you're an owner you're looking to invest in your business, maybe financially or through the contribution of your time, significant time. You were looking to get a return and employment returns, but also an investment return over and above that some sort of super profit rather than just having a paid job. So you're looking for a solid return out of your business. That might come through dividends, it might come through wages, as I said, other people will invest in your business for interest return. Financial institutions for argument's sake. They are looking to make money on you by lending money to you, so they need a financial return.

Other parties, such as external investors will look at maybe dividends, but ultimately some, Venture capitalists look at capital returns, capital growth in the investment, and an exit point down the track.

There are also some non-financial returns that people may look for, or parties may look for in investing in your business. They might be for example, product based returns. And what I mean there is I'll talk a little bit later about crowdfunding, but some crowd funding arrangements look for return based on product. Not necessarily. Cash dividends and capital growth.

Others may look for technology advances and your contribution to technological advance through your business. For example, where the government comes into play through R&D tax incentives, they are providing an incentive, so government money is being put towards that incentive in the hope that there is a return greater technology base for the country.

And finally, with other government programs, their return, the return that they look for is in relation to jobs and economic growth. So it's not always a direct cost of losing some of your equity or paying interest or so forth. There are various other ways of funding where people are looking for different sort of return, parties are looking for different sorts of returns.

Why would somebody choose not to invest in your business?

Why would somebody not invest in my business is a very good question. And it's all about risk. It's the perceived risk or actual risk involved in investing. And that risk may come directly because somebody is invested in the business and there is no income return. The business hasn't been able to fund interest or pay dividends. It may be that the risk is greater than just not receiving income. It may be that the risk is a loss of capital. So someone's lent you the money, not only haven't they got any interest, but you're not going to be able to repay the loan. And I know in a number of situations, businesses in financial distress, that's how business owners feel with the amount of time, effort, and money that's been invested in business. They're thinking whether they can actually get the money back out.

There might be an inability to deliver on forecast outcomes when I'm talking about jobs growth, and when I'm talking about technology advances and so forth with government type arrangements, there may be an inability of the business having been invested in to return the sort of things that are expected from that arrangement. Or it could be with a venture capitalist that they doesn't know appear to be an exit strategy. We haven't been able to achieve those business goals that we've set out to achieve, so they're stuck in for the longer term, rather than the shorter or medium term, which is what they invested for.

There is also an indirect cost potentially which might be opportunity cost. If I'm going to invest in your business, then I might not have the ability to also invest in the business next door, and I've got to make that decision. Where does the best risk lie? I don't want to lose a better opportunity next door because of the investment that I've made in your business. That whole explanation about risk.

And before that, the return on investment cuts to the chase of what funders are looking for all funders will compare the potential return on investment against the risk that they're going to take in making that investment.

Why do you need to get finance in the first place?

Let's take a step back for a moment. Why would I get finance in the first place? And some might say, well, you know, it's blatantly obvious because I need money. Why do you need the money? Is the next question. And I'll often ask this why, and then why, and then why again, to get to the root cause of what we're looking for here, because there may be a situation, for example, where I might not necessarily need to get the finance. I just don't know my business well enough and I haven't concentrated on managing the finances well enough to be able to understand the power of what's already in the business, rather than just reaching out and borrowing money. Because let's face it. When you borrow money, you've got to repay it. So it's better if you can get away with it, not to borrow it in the first place.

At the moment, a lot of people are struggling with cashflow. Particularly during the COVID restrictions. What we've got to do is we've got to have a good solid think about what our key challenges are and what our opportunities are at the same time. So where am I really struggling? Am I struggling with meeting the tax office debt? Am I struggling with paying creditors? Or am I struggling to understand how I cashflow works? I don't know what it looks like next week because I haven't stopped to think about it.

Is it that I need to take the next step in my business, or I need to shift and pivot in relation to my strategies? Because the environment's changed and those strategies need to be mixed up a bit. I guess I'm starting to head there towards opportunities. So what opportunities are there? Let's take a glass half full approach at the moment and say, if I'm challenged over here, what other opportunities might I have and what do I need to fund by way of cashflow input or, or finance or investment input.

Then we need to consider where we think we're going to be. So it's a bit of one of those Now, Where, How-type situations. Understand exactly where you're at at the moment. Have a think about where it is you're trying to head to. And in these distress times we tend to focus on more disaster scenario planning. And I don't like to use the word disaster because it all sounds doom and gloom, but, let's just drop the disaster out of it and call it scenario planning.

Business scenario planning

Under scenario planning, we'll have a look at three different situations, for arguments sake we’ll have a look at, what if this pandemic situation has a mild effect on us, a medium effect on us or a significant effect. And look that effect could be negative, but it could also be very positive. I know a couple of businesses or a number of businesses in a couple of industries that are doing extremely well and are also challenged financing wise to be able to work out how to best take advantage of the good times that they're currently having. So this isn't necessarily all doom and gloom, but let's have a look at that scenario planning. Where might I be with mild effect, where might I be with a medium effect, and what is maximum affects scenario?

What does it look like? What are the things different characteristics of each of those scenarios, what are the assumptions around it? And then fundamentally, once I understand that, trying to work out, do I need assistance at all, what might that assistance look like? How much do I need? When do I need it?

Then if we understand that we have a need and an approximate, how much we might need, we've got to work out, how are we going to go about getting it? Getting into a bit more detail around the sources of funding, i'll talk about the internal sources of funding initially. Internal or related investors are the owners, possibly the management that are involved in the business.

The employees can sometimes get involved with employee share schemes and so forth, or, or even a potential buy-in to some level. But the key underlying source of most business finance is their own cash flow and the ability to be able to manage that cash flow effectively enough to not have a big need for external expensive sources of finance.

External sources of business finance

We then look at the external sources of finance, the unrelated, the arms length parties, and those arms length parties can be external investors; joint venture partners; we are involved in trying to have a win-win situation with another business that's in a related or the same industry and you're trying to diversify horizontally or vertically what your, your product offering is. They are parties that don't necessarily have a direct connection with you, but may invest because there's a mutual benefit.

You can also end up with effective investment through supply chain partnerships. And what I mean by that is getting together as perhaps a joint tender, because you have a really good supplier, who supplies you this particular thing that you need a lot of to be able to put in a successful tender for a significant government contract for argument's sake. There might be a way that you can work together to create funding that, that suits you both, whether it's payment terms or joint financing arrangements or whatever. So there are those sources of external funding that you don't necessarily think of traditionally.

Government funding

The next source I'll deal with is under the broad heading of government funding. And during this video series, you'll see a number of different videos on, a number of different aspects of this. So the first one I'll go to is the potential for grant funding. And I'm sure you'll be interested to see, getting grant ready video in the series. Grants can come from all three tiers of government. They can also come from community not-for-profit bodies. There are, usually a regime of different grants. The federal funding can come through the likes of AusIndustry for argument's sake. The state funding with Advance Queensland and even local councils, regional councils will even have funding. As I know, Moreton Bay Regional Council does through their grant funding.

Something to remember at the moment is budgets have been deferred across many levels of government. With the deferral of those budgets it means that coffers haven't necessarily been renewed to be able to put out the next round of different funding levels. So the sort of funding that traditionally may be there, may still be there in the future, we had to see based on how the budgets come out. But it might be that the cycles take a bit longer for those, for those programs to come through and open back up again for applications. When they do open up it's, it's usually a very stressful little period trying to pull everything together to get a solid ground application in, as it is for a bank loan at times, which I'll get on to next.

But as you'll see, one of the lessons I'm trying to draw from this video is to make sure you understand and prepare for your cash flow situation to make sure your business finance is running smoothly. But then also to make sure you're well prepared for whatever we need to do to ensure that we can take advantage of grant fund rounds when they pop up or to get to the bank in good time to be able to access bank finance.

Other forms of government funding, and I mentioned one a little bit earlier when I was talking about returns on investment for government, R&D tax offsets or R&D tax incentives. So under that general heading of incentives, and R&D is a prime example of that, where if you're in startup or, or making a loss, because you're doing a lot of research and development and investing money in that you can actually get the payment of cash by way of an R&D tax offset.

R&D tax incentives, though, if you're up and away and you're trading and you're going hell for leather is, is more of accelerating your tax deduction. So you're paying a little bit less tax, which means you've got more money to put into that R&D.

You've also got some government options like equity through Queensland investment corporation and so forth, where semi government or government funded bodies may well take an equity interest in your business if it fits the right parameters.

Financial Institutions

So moving on to financial institutions, this is what we all know as your typical source of finance. You go to a bank and ask them for a loan. You’ve got to have bricks and mortar security to be able to get the loan. That's your typical finance, but it doesn't all look like that bank finance can, can also be based on cash flow lending. It can be non bricks and mortar security. If you've got a particular value in your business or a value in your balance sheet. So it's important to understand the parameters of what might be available to you in that regard. You've also got non bank lenders specialists, lenders who do things like also lend against invoices and the like. I've also seen, um, to mix up a couple of these incentives and sources of funding, I've seen lenders of late, that will lend against a certified likely R&D tax offset amount so that you can get the money a bit earlier than what you get it from the tax office, so you can invest further in R&D, and I guess in some ways increase the incentives that are going to be paid to you.

Start up and growth. I'll run through these fairly quickly. Um, when we're looking at startup and growth, we talk about angel investors. We talk about crowd funding. We talk about equity, crowd funding. These all typically come up in a sequence. Your angel investors as such other very, very early stage investors, um, where your pitch to them, the amounts that they invest aren't necessarily large, but they're quite expensive. You've got to give away a fair bit of equity to get angel investors involved in your business, because they are investing in an idea or a dream or potential.

Crowd funding, when I was talking about returns on investment earlier, crowd funding typically is, “I will pledge $50 for you to help this product so long as I get one of those products by the time you've got it up and away”. So it's more of a product return than an investment return.

Equity crowdfunding is a little bit different. Recently in Australia over the past three or four years, we've had a regime of government regulation come in that enables crowd funding to occur, but under fairly strict parameters. And it's called equity crowd funding. It's governed by the corporations law, and there are limits on how much you can raise each year and how much each individual can invest. And it's called crowd, not necessarily straight equity funding, because it's up to about $10,000 per investor for a year. So you do to raise a decent amount of money you do actually need a bit of a crowd.

There is one step further that we can go with government regulated funding which is ESIC, which is early stage innovation companies. Where if, again the parameters are right, the nature of the company is right, and the investor meets all of the appropriate regulations, they can actually get some pretty significant tax incentives for investing in an early stage business, which they're still after a return on investment, they're still concerned about risk, but that return on investment becomes easier to sell when you are getting significant tax incentives alongside it.

Venture Capital

Venture capital tends to come on a little bit later. It's when you've got something where you might have a minimum viable product, you've got an idea that's up and away, maybe it's commercialized, and you may have used another grant funding round, for argument's sake, in that commercialization with the accelerating commercialization funding program through AusIndustry. But you're at that stage, you've still got to do a bit of a pitch because it's very early days and it may be unclear as to what your market is, but the venture capitalists will then come in and say, I'll invest a larger amount of money, it doesn't necessarily cost as much in equity for you because you've got tangible value for your product, but typically those venture capitalists we'll want to see an exit. They'll want to see a solid return at some point in the not too distant future.

That tends to be sort of the more traditional sources of funding that I've rattled through fairly quickly. I'll delve a little bit deeper into the COVID-19 stimulus funding specifically. A lot of you would know about what a lot of these are at the moment, but you may not be aware necessarily of all of the different timelines and deadlines involved, and some of these timelines are absolutely critical.

COVID-19 business financing opportunities

COVID-19 measures. We've got, for example, at federally, we've got the instant asset write off up to 150,000, which was going to cut off at the 30th of June, but has now been extended to the 31st of December that doesn't necessarily directly inject cash. It helps you save tax, which is sort of like an indirect cash injection. But what it does, I guess, is it's just as much as stimulus of federal government stimulus measure to encourage people to invest in business, invest in assets, which keeps the money going around.

We've got the cash boost through the lodgement of the BAS, which is all a function of how much an employer withholds by way of PAYG withholding. It's automatic. You don't have to meet any, any requirements there. If you're unsure about that, obviously talk to your advisor if you're unclear about what it is that you should do getting, and whether you've had that advantage.

The big one, the JobKeeper Scheme. This one is constant deadlines. It can be a bit tricky to assess your eligibility for the program. So it's really important that you do your research, talk to your advisors, understand your eligibility here. Eligibility is not necessarily totally dependent on being COVID affected, but there are particular parameters where you may have had a reduction in turnover for a non necessarily COVID reason, you're still eligible for these JobKeeper schemes. So you should absolutely make sure you're across these and see if the money is available there.

Then there are a smaller incentives like the apprenticeship wage subsidies and so forth. Again, do your research.

ATO support for your business

ATO support. With the ATO are taking by a more gentle approach with debts, I guess, and they are taking that a more gentle approach under direction and in acknowledgement that a lot of businesses are doing it really tough, and if they start tightening the thumbscrews, it is going to create some real financial distress, distress, and some real economic issues.

To rattle off a quick list. We've got the third payment arrangements. A number of payment arrangements have just been deferred without question to September, where we then have to get in touch with the tax office and negotiate payment terms. Those deferral of payment arrangements has also come with little or no general interest charge being levied.

On the face of it, great cheap finance for the business, but just be very careful because whilst you're not paying these debts and whilst these payment arrangements are deferred, they are not being waived. They will come back and will have to be paid at some point. And we have to be prepared for that.

Other OSR supports are things like Queensland payroll tax for employees that are big enough to pay payroll tax. There are quite some incentives for that. There was also land tax incentive arrangements happening for property investors. Again, very strict parameters that you've got to fall within for those.

Why am I going through these stimulus packages? Because they're all in a way, ways of funding a business through this difficult time, you need to be across these to understand all of the available cash and cash flow requirements.

We have smaller grants. We have the Queensland small business adaption grant, which is going through a few rounds. Now be across that these grants are being snapped up very, very quickly. So it's important that you're well and truly on top of these, so that if they do pop up, you're able to take advantage of them. There is the, also the federal governor SME bank guarantee scheme where the banks are given a co-guarantee by the government to effectively 50% of the loan to help businesses are struggling with COVID through their cashflow challenges.

This is not necessarily a given and these are loans that you have to be very, very careful about making sure your approach properly. If you turn up at a bank and say the government say that I can get a $250,000 loan from you, I want the money. You're very likely to be shown the door pretty quickly because it's not a professional approach. You're not well prepared. You're not showing the bank what the return on their investment is because at the end of the day, it's half guaranteed, but they've still got a bit of money to lose.

It's very important that we prepare, we know how much we need, we know how long we need it for. And we know our capacity to repay so we can have those conversations upfront with the bank with plenty of time before things become an issue financially.

The really important message here is to prepare, and plan for your success. It's all about knowing your need. Good forecasting is essential. Knowing and addressing your risks, the risks that you have in your business and the risks that others might perceive are in your business to affect their ability to be able to fund.

Understand the return on investment that you're offering, and lock in your required contribution. If you need to contribute something here, lock that in and make sure that everyone understands that you've got some skin in the game as well. Really important to present professionally, and know the deadlines. Know the stimulus time tables. When does JobKeeper stop if I'm eligible for the scheme? When can I get in? Have all your application details ready to go? But I can say your biggest deadline is none of these external schemes. It's none of the stimulus. It's none of the JobKeeper stuff. Your biggest deadline is your Cash Exhaustion date.

Just be absolutely aware that you are well across that. Document properly, be aware of the timeframes and these government goalposts move pretty quickly at times. Make sure you're well across it. Make sure you have a means of staying in touch. Make sure you're being advised properly and that you've got a good stream of information coming to you.

So in relation to where we're at, there is no substitute for knowing your business, knowing your cash flows, having good support. You can also get plenty of support from your advisors, your advisors website, or the Coronavirus treasury site. Good luck. Stay safe and stay strong.

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