Sources of capital

Information on sources of capital, both equity and non-equity funding.

Sources of capital

Non-equity options

There are all sorts of ways you can raise capital for your business without giving away equity. Here are some of them.

Your own funds

This typically comes from:

  • Personal savings
  • Equity built up in the family home

These funds are usually the cheapest form of finance and the easiest to secure, because the bank has the home as collateral (security) for the loan.

Pros

Cons

  • You retain full ownership
  • There are no repayment costs
  • Sends a message to other investors that you are serious
  • Assume personal financial risk
  • Depleted savings leaves you little buffer if unexpected expenses arise

Funds within the business

It’s also possible to gain expansion capital from within your business by:

  • Building up your working capital through business growth
  • Increasing your cash flow through better management of your debtors and creditors
  • Factoring your receivables (i.e. selling your debts to a factoring house that will, for a commission, advance you money against your debts)
  • Increasing your business debt.

Pros

Cons

  • Managing cash flow wisely doesn't cost you anything
  • You stay focused on cash flow
  • Factoring uses money owed to you as equity
  • Factoring comes with the cost of using the benefactor's money

Getting money from a bank

The most common source of funding is bank lending and most businesses make use of bank loans in some form or other. The bonus here is that you maintain ownership and control of your business.

Pros

Cons

  • You retain full ownership
  • Debt is often cheaper than equity                                  
  • Banks are conservative lenders and often require collateral or other support for the loan
  • Creates a loan obligation and interest that must be paid back

Financing from friends or family

The next step for most business people is to approach people they know for more funding. This could be in exchange for either interest payments or a share of the ownership. Of course, this approach carries its own unique risks.

Grants and other funding

Grants provide a good finance source for specific undertakings. They typically do not require repayment, but often have specific qualification criteria and usually a series of commitments and conditions that are agreed before the funds flow.

If your business qualifies, there are a number of grants, awards, subsidies and funding sources you can access. Visit the business.govt.nz website for more details.

Pros

Cons

  • Funding with no interest charges, no requirement to repay except where grant conditions are breeched
  • and no personal security.
  • As well as finance, the grant source can often assist with access to high value networks and contacts, capability building programmes and specialist advice.
  • More flexible future financial borrowing opportunities; it may be easier to raise further funding on the back of the grant funding.
  • Can bring discipline to governance, milestones and reporting                                                                                                         
  • There are often specific criteria you have to meet to be eligible for a grant eg location, sector, purpose, individual company status and background.
  • They can have application deadlines (which may have already passed).
  • It takes time and effort to work through and complete the application process.
  • They may require matched funds eg the project requires $100,000 - the grant provides $50,000 conditional on the company raising the remaining $50,000.
  • They are often tied to specific undertakings and milestones. If the business then decides to change direction it can be difficult (and in some cases impossible) to amend the terms of the grant which may result in funds not being released or withdrawn

International Growth Fund

The $30-million International Growth Fund is part of the tailored package of services NZTE offers to the businesses we work with most intensively. Funding is accessed via an NZTE Customer Manager and skewed towards supporting fast-growth export businesses, and sectors and regions that present the greatest opportunities for international success. Businesses that receive this funding need to at least match the level of investment that NZTE makes.

Bootstrapping

“Bootstrapping” (pulling yourself up by your own bootstraps) means finding funds and resources from unusual, creative or innovative sources. Dell, Virgin Group and The Body Shop are all examples of companies that started out this way. Research online for inspiration.

Pros

Cons

  • You retain full ownership
  • Forces your attention to sales                      
  • Can be slow going
  • Cash advances or purchasing supplies can be difficult

Strategic partners

Sometimes, you might think you need money but what you really need are things, skills or time. Taking on a strategic partner can help you gain these things without you having to part with shares. For example, you could:

  • Give away desk/office space to someone in return for training from someone who has skills that would enhance your business
  • Partner with a major corporate who could easily introduce your product to new markets
  • Join forces with another business that has the equipment and supplies you need.

Pros

Cons

  • Low monetary cost                                                                       
  • The wrong partners can cost you a lot of time and money (make sure interests are aligned and have a good lawyer ride shotgun)


External sources of finance

If you have exhausted your non-equity options, it may be time to think about external investment. This usually means giving away part of your business in exchange for capital.

Angel Investors

These are usually successful individuals who have spare cash that they choose to invest in high-growth companies. They are interested in good returns but are also attracted to the energy of a young company – sometimes backing people they like as much as the idea itself.

Angel investors usually put up anything from $10,000 to $1 million, but they do expect a decent return on their money (minimum is usually 30% annualised return over 5 years or 1000% return on exit). They also often want some ownership of your business or a convertible security (a security that they can turn into cash if necessary) to compensate them for the risk.

See www.angelassociation.co.nz for more information.

Venture capitalists

These can be defined as investment companies or fund managers that give cash in return for part-ownership of your business. They tend to favour only high-growth companies that are likely to provide them with an average of 30-40% annual returns on their money, which equates to a return of more than 500-1000% on exit. They usually have a clear exit strategy and take their money out of the company when they leave.

While this seems like a high price to pay, venture capitalists will provide more money as well as more expertise, support, contacts and management help.

See www.nzvca.co.nz for more information.

Corporate investors

Larger companies (that are usually multi-national) are not generally as concerned with high interest rates or taking a percentage of the company, instead they want to buy you out. They have usually spotted some key synergies between their company and yours and want your business because you can either do something they can’t, or you do it better.

Remember – investment is a two-way street

Raising capital is a complex process and it’s never too early to plan your businesses growth and capital requirements – it will make succeeding a lot easier. If you want further advice, a great first step is to talk to your bank, Accountant, Lawyer or business advisor, local angel group or local regional economic development agency.

Private Equity

The majority of private equity investment consist of institutional investors and accredited investors who can commit large sums of money for longer periods of time. Private equity investment often demand long investment periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. Private equity investors typically invest to turnaround a company, support a management buy-out or into established companies with a known history and who are looking to establish or grow markets.

Initial Public Offering (IPO)

You’ve probably heard of companies being “floated” on the Stock Exchange – in other words, they’ve been opened up to investment from the public. An IPO is often not an option for early-stage companies, but occasionally it can work where there is a broad consumer appetite for the product in question. See www.nzx.com for more information.

Pros

Cons

  • Provides cash to fuel growth
  • Gives you strategic flexibility
  • Adds credibility
  • Creates culture of ownership within the company
  • Strengthens company infrastructure                                                                       
  • Puts company in public arena with much greater visibility into your business
  • A higher and legally binding disclosure standard
  • Costs can be substantial, both in setting up the IPO and the ongoing costs of a reporting
  • A drop in share price can lead to a lack of liquidity
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