With the Federal Government currently promoting innovation and risk-taking in Australia through support and generous tax concessions, it’s now more attractive to invest in Early Stage Innovation Companies (ESICs), and also for these businesses to obtain capital funding.

 

So what about other SMEs, whether it’s a new business or an existing sustainable business? Where do you go to obtain funding to continue to grow and expand your business?

 

Generally SMEs seek funding through two sources, capital contribution from owners and debt financing with a corporate lending institution. As a common practice, SMEs tend to provide the last set of financial statements to their banker and hope for the best. Lenders will evaluate the business to determine the ability to repay debt (and in most cases, securing against equity). The healthier the business looks, the more the funding options available, and usually at better rates.

 

One of the key steps that businesses fail to consider prior to seeking funding is reviewing their credit profile. This can be critical for businesses within certain industries and even new businesses with limited financial history. Whether you are seeking financing through debt or equity, here are a few key areas that will assist in increasing your credit profile for lenders or your business profile for potential investors:

 

1. Preparation of an Information Memorandum (Business Plan) outlining the key information that investors (including banks and financiers) will be seeking, such as:

• Growth plan and forecasting

• Identify the opportunity within your business

• Clearly set out how the money will be spent

• Valuation of the business

• Core drivers of the business

• Highlighting ability to repay debts or return on capital

• Strategic value and key assets

• Identifying and outlining key stakeholders within the business.

2. Clearly identify the amount of funding required to uplift the business through the growth stage. This ensures profits are not diluted through debt repayments or capital return.

3. Seek professional advice and assistance from tax and legal advisers. Having a core support team around you at this important time will ensure you are thinking straight when considering your options, and will help you to maximise the potential at the outset.

 

Through the process of raising capital, linking with the right investor may be valuable beyond purely the financial aspects as you may be able to leverage off their experience and networks. When seeking investors, look for opportunities where the investors can add more value to your business or to your knowledge and experience. Consider whether you are able to leverage off their experience and networks (this is known as ‘Smart Money’).

 

As the initial business owner, you are the heart and soul of the business, and as much as you would like to work with a particular investor, they would need to want to work with you too. Potential investors will not only be looking at the business opportunity but who they will be partnering with.