Startup Funding: How to do it
Here at SmallBusinessLoansAustralia.com we specialise in recommending the best small business loan providers in Australia. However, we are acutely aware that it’s not always possible for small businesses to meet the criteria set by loan providers and actually receive a startup business loan.
This is particularly true for brand new startups. As an example, almost all business loan providers which become.co works with require at least 6 months of trading history from a business before it will consider granting a loan. Most lenders like OnDeck require a minimal credit score. This criteria is obviously not achievable for brand new startups and they may need to consider alternative forms of funding. Here we breakdown the alternatives to a startup loan to ensure your business can still get the injection of cash it badly needs from the outset.
Review the plausible scenarios for startup and new business funding below.
Crowdfunding for Startups or Crowd-sourced Funding?
The ASIC is very particular in its definitions to separate crowdfunding from crowd-sourced funding.
Crowdfunding is typically used by artists and entrepreneurs for unique projects. Websites such as pozible give you a good idea of the type of small businesses seeking crowdfunding – anything from musical concerts to fashion films and gin distilleries. For those who contribute to the funding it’s a bit like making a donation to a charity, there is no exchange for shares in the business or a future monetary return.
And using the examples above those seeking crowdfunding may offer incentives in other forms such as; discounted tickets to the first screening of their fashion film, weekly podcasts about their upcoming music concert or a free bottle of gin for those investing in the distillery. Crowdfunding for startups gives business owners the opportunity to get creative in their pitch for funding.
As the money to your business through crowdfunding is treated as more of a donation you may need to pay GST or income tax and should speak to an accountant.
Crowd-sourced funding for a startup does see an exchange between the business seeking investment and its investors. Those seeking investment will offer investors either equity in their business or returns in the form of a startup loan where investors will be paid a pre-agreed amount in interest. Going down the new business loan route via crowdfunding could prove tricky though.
Bearing in mind that crowdfunding will see many investors pledging smaller amounts, administration could soon build if you’re setting up individual loan agreements with each investor. Investors putting money in at the startup stage are also much more likely to prefer shares in return which sees equity sharing as by far the most common form of crowd-sourced funding for startups.
Startup Funding from Angel Investors
For those businesses prepared to give equity away there’s also an ever growing number of platforms looking to match budding businesses with angel investors. The Australian Angel Investment Network has over 200,000 angel investors and users can easily add their pitch to attract investors as well as search for investors relevant to their industry.
Businesses looking for more local investment can visit either Sydney angels or Melbourne angels with both organisations looking to build long-standing relationships between startups and investors. Not only connecting its users for startup funding but also for future funding rounds, events and knowledge sharing.
Financing by Venture Capitalists (VC)
Similar to Angel Investors, Seed Venture Capital firms will provide startup business financing in return for an equity stake. Rather than just one or two private investors though a VC will be using funds raised from limited partners such as pension funds and high networth individuals.
As firms that are managed by professional investors the investment usually comes after the startup phase and is much larger than angel investment and investors will certainly be expecting a return on investment, typically with a 5 year investment cycle.
In return for the greater investment levels the chances are you will also grant more equity to a VC so it’s important to consider your control rights within the company. The VC will look to appoint its own board members.
Government Funding for Startups
The Government support in Australia for startups is amongst some of the best in the world. As a result there are a number of federal and state specific grants that could provide new business funding to startups. Businesses can input their post code to begin their search for government funding through the Australian Government website as well as refer to our full directory of Government grants that we’ve put together ourselves.
Replacing a Startup Business Loan with a Personal Loan or Loan from Friends & Family
For early stage startup funding there’s an argument that taking a personal loan out is a perfectly plausible way to fund your business, particularly if you are registered as a sole trader, then you are well within your right.
However, it should be noted, that in almost all cases the banks terms and conditions state that personal loans should not be used as a business loan. In particular you may encounter issues should you wish to change the terms of the loan once you’ve formed your business. The bank will want to know why you’re making a request and if it is discovered the loan is for business purposes you may have to repay the loan plus any interest due immediately.
Similarly, it’s important to understand that a personal loan is under your name rather than the businesses’ name so if something went wrong with the business you wouldn’t have the same protection as you would with a business loan to a limited liability company. You are personally due to repay the loan in your name.
If you’re fortunate enough to have friends or family whom you can borrow the funding for your business from then this is obviously an option too. The same would apply with a bank though, don’t borrow beyond your means and stick to your repayment schedule.
Bootstrapping the Business With Your Own Cash
And finally, of course, if you have saved money or are able to earn money to fund your startup then this is by far the best form of startup financing for early stage businesses. If investors are to invest their money it will always look more favourable if you are prepared to fund your business yourself. Aussie firm Envato has grown to become a multinational business with offices in Australia, USA and Mexico and borrowed no money in its start up stage.
If you don’t have the cash at hand we would recommend steering clear of remortgaging your house or selling large assets such as your car. Being overly caught up in your new venture with everything to your name is not a good place to be – seeking investment or a new business loan would be much more preferable methods to finance your start up.
Concluding words on financing a startup
There are a whole host of options out there to fund your business in addition to a start up business loan. Depending on your relative factors such as the stage your business is at and the industry you operate, one of or a combination of the above methods discussed here could be the best startup funding option for your business.