Growing your business often needs an injection of capital – but how do you go about raising it? This article looks at the options, and how to give yourself the best chance of success when raising capital.
Before you start
Do your homework:
The first step is to work out how much you need to achieve your business goals.
Once you know how much you need, consider whether you can raise it yourself before you look at external sources of capital. For example, do you have any savings (either business or personal) that you could use? If you have unused assets in the business (e.g. machinery that’s not used very often, buildings or excess stock you could shift), weigh up the advantages of selling these first.
If raising the money yourself is not feasible, you’ll need to consider external options.
Understanding the options
This is simply borrowing money to finance your business growth, which usually requires you to pay interest on the loan or debt. The most popular sources are:
Friends and family. Often a first option as they are easy to approach, but take care. Owing money to people you know isn’t always a good idea as it can affect relationships, particularly if something goes wrong.
The bank. Your bank may be able to assist with anything from short-term funding like an overdraft (e.g. for buying extra stock) to longer-term loans for new equipment or buildings. Interest rates for loans with a property as security are almost always cheaper than unsecured finance (where loans aren’t secured against a property or other assets), so consider whether you have any spare equity in your house that you could use. You might also consider asset finance, where you borrow cash over the value of an asset, work in progress or stock.
This is where you raise cash in exchange for selling part of your business (i.e. you give up some of your ownership (equity) in your business. Giving up some ownership (and control) can be a hard decision so you need to think about how comfortable you are with the idea. However it may be necessary for the business to grow – and remember that you may prefer to own 40% of a business worth $2,000,000 than 100% of a business worth $150,000.
The main providers of equity capital are:
Angel investors - Angels are people (often other business owners) who think your business is promising and are willing to invest in it. One advantage of angel investors is that they’re usually keen to invest at an early stage, which can help with your start up. Another is that they often have a lot of knowledge, experience and connections you can take advantage of.
Government grants - it’s worth checking out whether your business qualifies for government grants or other assistance – visit business.govt.nz for more information
Corporate investors – sometimes large companies invest in smaller ones that they have a vested interest in seeing grow and expand - large customers or suppliers may be worth exploring
Crowd funding – online capital raising forums such as Snowball Effect or Pledge Me are increasingly popular. Crowdfunding platforms are licensed by the Financial Markets Authority – check out the FMA website for more information.
Planning for success
Preparing your business for raising capital
Regardless of where you get the capital from, the more prepared you are the better. Use these tips to help:
Consult with your network – an ANZ Business Specialist, lawyer and accountant are all people you should consult about finding investors. They’ll have good contacts and can help. It’s also useful to talk to other business owners who have successfully raised capital.
Build your business case – review your business plan and make sure it’s presented well. Imagine you’re a prospective investor – would your business plan convince you to invest in your business?
Get your financials sorted – present your actual and projected cash flow and profits. Make sure you outline your assumptions when it comes to your forecasts. (You can use our Cash Flow Forecast and Net Profit Forecast calculators to help)
Get your businessready – investors want to see that your processes and systems are running smoothly, you’re monitoring your KPIs and providing an excellent customer experience, amongst other things.
Show you’re special – highlight your point of difference from your competitors and what makes you stand out from the competition. Demonstrate how you’ve protected your Intellectual Property and if you can show that your business is scalable (for bigger markets), or well-suited to changing or new markets, so much the better.
Sell your team – show that they’re experienced, skilled, and ready for the journey. Be upfront about what gaps that need filling - the investor may be able to help you fill them.
Research potential investors – don’t grab at the first person to offer money. Make sure you’ve done your due diligence on all potential investors so you can decide which will work best with you and your business.
Put yourself in the shoes of potential investors – think about what questions they will want answered and what they will be looking for, for example:
The product/market fit – what problem is this solving, how big is the market and how much will people be willing to pay for it?
You – they will want to be sure that you have the passion and determination to succeed, and that you have the right team behind you
Validation and risk mitigation –e.g. how many customers do you have, what are your sales?
Competitive environment – who are your competitors, how will you protect your Intellectual property / business model?
If you don’t succeed in convincing investors to back you, it doesn’t necessarily mean your business idea is a bad one. There could be many reasons why people choose not to invest, from timing to other opportunities or simply differing perceptions of risk or market potential.
If you get a rejection, ask why – it could give you valuable insights that can help you improve your product, or tailor your ‘pitch’ to better appeal to potential investors. And for investors who are on the fence, keeping them in touch with periodic updates on your progress may help get them over the line.
This material is provided as a complimentary service of ANZ Bank New Zealand Limited ("bank"). It is prepared based on information and sources the bank believes to be reliable. It is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.
This material is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you wish to consult an ANZ Business Specialist, please contact us on 0800 269 249.