How Will You Fund the Business?
There are a number of options for funding a business, each with their own advantages and disadvantages. New businesses have fewer options than existing businesses, and options available to some business owners may not be available to everyone.
The main options include:
Bootstrapping (which comes from the phrase “pulling yourself up by your own bootstraps”) is starting a business using only your own money and any money coming in from the new business. Many small business owners use personal savings, credit cards, take out personal loans, or borrow against the value built up in their home or other personal assets to bootstrap their way into business.
You can also use personal assets in the business. For example, using your personal vehicle for the business means the business does not have to buy its own. Even operating from home instead of leasing or buying premises is a kind of bootstrapping.
Using personal finances means you keep control over all decisions and don’t need to give up any control to investors. If you decide to seek investors later on, they are much more likely to back you if you can prove you’ve invested your own money. On the other hand, it can take a lot longer to develop and grow your business if you are solely reliant on your own money for funding.
Friends and Whānau
Many business owners also approach whānau and friends for funding. This could be a loan in exchange for interest payments or an investment in return for a share of the business. Make sure they know which it is! You don’t want them to think they own part of the business when they don’t. Another option is to ask someone to be a guarantor for a loan: however, this exposes them to risk with no reward – think carefully before you ask anyone to do this.
A benefit of borrowing from whānau or friends is that the terms are likely to be better than borrowing from a bank. Even so, you need to make sure the terms are fair. For example, if your parents own a house and choose to borrow against their house to lend you money, make sure the interest rate you offer them is at least as high as the interest rate the bank is charging them. This is still likely to be a lot lower than the interest you would have to pay on a personal loan, for example.
However, you need to take care that personal relationships are not affected. You will need to communicate frequently and honestly with anyone you receive money from so they are clear about when they can expect repayment or dividends.
Loans from Banks and Financial Institutions
The main advantage of borrowing is that you keep full ownership of the business. Once you have paid off the loan, you have no more responsibilities to the lender, and they don’t own any of your business. However, you will have to pay interest and repay the loan within a certain time limit.
When deciding whether they will lend to you, the lender will consider:
- Why do you want the money? Does your business idea have merit?
- How feasible is your business idea?
- Have you prepared a cashflow forecast? Does it show if your business can afford the loan repayments?
- What kind of character do you have? Do you behave with honesty and integrity? What’s your previous credit history?
- Do you have previous business skills and experience?
- What kind of assets do you have that could act as security?
Factor to Consider
Many lenders will not offer business loans to new businesses. It is common for them to require the business to have been trading for at least six months. One option may be for you to secure a personal loan and use this money in your business. However, if you do this, ensure you will be able to make the required payments on the loan during the start-up period.
Many small business owners borrow money at one time or another, but that doesn’t mean it’s always the right decision.
Generally speaking, taking out a loan can be a good idea if you:
- need the money to grow, rather than as a bailout,
- are confident you can make repayments on time, every time,
- are likely to pay it off early, reducing the amount of interest owed, and if you understand all the terms and conditions.
Common borrowing mistakes include:
- Borrowing money without (or inaccurately) forecasting your income.
- Taking out a loan which requires you to start making loan payments before you receive any income from customers.
- Not understanding the terms and conditions of your loan, or being aware of the interest rate you’ve agreed to pay.
- Getting a loan and spending up large – it might feel like easy money, but have a plan for what to spend it on.
- Not having a plan in place to pay back your loan – it’s important to budget for regular repayments.
Factor to Consider
Make sure you can afford the loan repayments, even during slow months and at tax time. Banks and other lenders aren’t very lenient when it comes to late payments, so be confident you can pay on time, every time. Prepare a cashflow forecast and think carefully about when you can expect to start receiving money from customers.
Loans and Grants from Other Organisations
Banks and finance companies are not the only organisations which offer loans. You may be able to secure a loan from an organisation which aims to support small businesses. Some organisations even offer grants or equity finance. A few examples of organisations include:
- Māori Women’s Development Incorporation: Offers loans to support Māori women and their whānau to start or grow a business.
- Poutama Trust: Provides grants of up to $10,000 to investigate and grow a business, as well as to receive business training. These are on a 50:50 basis, meaning you must contribute at least the same amount that the trust contributes.
The Ministry of Business, Innovation and Employment (MBIE) has information on government grants and assistance.
Government assistance is available from:
- Work and Income. Has support available for people to start their own business, including the Business Training and Advice Grant and the Flexi-Wage Self-Employment Subsidy.
- New Zealand Trade and Enterprise. Has a range of services to help businesses – including those which are starting up and who want to export.
- Callaghan Innovation. Provides assistance to innovative and high-technology businesses, including start-ups. Services provided include access to experts, technology and product development, and a Getting Started Grant.
- The Regional Business Partner Network. Provides advice on the types of help you might be eligible for. Local business advisors can give you information and tools to help build your skills and knowledge, connect you to business networks and advisors, and advise you on other kinds of government assistance.
- Te Puni Kōkiri. Offers services to help Māori business owners to identify their growth needs and to support them to realise their growth potential.
- Energy Efficiency and Conservation Agency (EECA). Offers various types of support, including grants, to help your business save energy and make greater use of renewable energy.
Factor to Consider
You usually have a better chance of securing grants and funding assistance if your business is innovative, technology-based, and has significant export potential or the ability to compete in world markets.
You can also get funding from investors. This is called ‘equity financing’ because money is given in return for a share of ownership (equity) in the business.
Finding investors takes planning and careful thought. You must be able to show potential investors that your business is a good investment – and have the data to back it up. An investor is hoping that your business will make money and that they can share in the profits. Having a detailed business plan will definitely come in handy.
Investors can provide money when banks may not be willing to lend. In addition, unlike a loan, you do not need to repay the money, and do not pay interest. This is extremely beneficial when you are starting a new business and have yet to build up a customer base.
Investors may also provide expertise, access to new networks and markets, and other support.
However, equity investment also comes with loss of control. Depending on what sort of agreement you have with your investor, you are essentially giving up a share of your business and of the profits you make. Investors may also want to be involved in running the business and in making business decisions.
One type of investor is an ‘angel investor’, someone who uses their own money to invest in high-risk, innovative businesses. They are not interested in long-term ownership – instead, they want a return as quickly as possible. Attracting angel investors can be difficult for new businesses because you need to demonstrate you can provide a large return on investment in a short time.
Another option is venture capital. Venture capitalists are groups or organisations that invest in high-risk businesses which have high profit potential. Unlike angel investors, they use their organisation’s funds as opposed to their own personal funds. The actual money that they use may come from numerous individual investors.
New Zealand has a few organisations that support venture capital and angel investment. Examples include:
Crowdfunding and Peer-to-Peer Lending
Crowdfunding allows businesses the freedom to raise finance from members of the public without having to be a public company (one which has its shares listed on the stock exchange). This money could come from whānau, friends, peers, customers, suppliers, and even complete strangers. Anyone can be invited to invest in your business through an online crowdfunding provider.
Equity and Debt Crowdfunding
There are two main forms of crowdfunding available to businesses in New Zealand:
- Equity crowdfunding (this is usually what is meant by the term ‘crowdfunding’). This involves attracting investors who will own part of the business.
- Debt crowdfunding (also called ‘peer-to-peer lending’ or ‘crowdlending’). This involves borrowing money from members of the public, and then repaying that money with interest.
In order to raise money through crowdfunding, a business uses the services of a crowdfunding provider. The role of a crowdfunding provider is to provide an online platform which brings together businesses who need equity or debt finance with individuals and entities looking for investment opportunities.
Providers of these services must be licensed by the Financial Markets Authority. You can therefore find lists of licensed service providers on their website at:
If crowdfunding interests you, you may wish to consider using Tā Koha. This is a kaupapa Māori crowdfunding platform launched by the Māori Women’s Development Incorporation and PledgeMe.
Factor to Consider
Equity and debt crowdfunding is suitable for small businesses – it is not something that only large businesses do. In fact, New Zealand law places a limit on how much money someone can raise in any 12-month period ($2 million). In addition, it is suitable for all types of businesses, regardless of how innovative they are or which industry they operate in. It is therefore much more likely a business can raise money using crowdfunding than from angel investment.
The term ‘crowdfunding’ is also used to refer to fundraising for projects or non-profit causes using donations or by offering rewards to supporters. In New Zealand, two popular crowdfunding platforms for social and community causes are Givealittle.co.nz and www.pledgeme.co.nz (Pledge Me also offers equity and debt crowdfunding for businesses and is licenced by the Financial Markets Authority). An example of a well-known US-based platform which provides project based crowdfunding services is Kickstarter.
Whilst this type of crowdfunding is not covered by financial market laws in New Zealand, it is legal. It is especially appealing for businesses which have a particular project in mind. For example, a business may raise money from the public for a new product by offering anyone who gives a certain amount of money one of their products as soon as it is ready (and before it is made available to everyone else to buy!).
Advance Payments from Customers
For some types of businesses it is acceptable, and perhaps even normal, to ask customers to pay a deposit on products or services ordered. This is especially the case if products are custom made, take a long time to make, or are very expensive. Getting advance payment from customers finances the cost of supplying a product or service, and assists cashflow management.
It is common in business for suppliers to supply goods on credit. This means they will supply you with items, along with an invoice, but will not expect immediate payment. If you do not pay the invoice straight away, you are essentially using your creditor’s resources to finance your business. This is of benefit to you, because your cash can stay in the business longer or be used for other purposes in the short term.
This does not mean that you should pay them late! What it does mean is that you can make the most of their terms of trade to benefit your cashflow situation. For instance, if a supplier requires payment by the 20th of the month following invoice, scheduling your payments to be made on the due date can give you up to 51 days of interest-free finance (if these goods or services were supplied on the 1st of the month). You may even be able to negotiate more favourable credit terms with your suppliers. This is more likely if you will be a major customer for the supplier.