Financing your business - innovationandskills.sa.gov.au · While a wellprepared business plan or...

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Financing your business

A guide for business operators in South Australia

http://www.statedevelopment.sa.gov.au/smallbusiness

Financing your business of 32

Table of Contents

01 Overview ....................................................................................................... 3

02 Determining financial requirements ............................................................ 5

03 Types of finance ........................................................................................... 7

04 Major sources of finance ........................................................................... 10

05 Developing the loan proposal ................................................................... 11

06 Are you a good risk? .................................................................................. 18

07 Maintaining a successful relationship with your financier ...................... 26

08 Crowdfunding – another source of financing your business .................. 28

09 Notes ........................................................................................................... 31


01 Overview No business activity, whether it be marketing, sales, production, administration or planning, exists independently of the financial factors governing the operation. Finance is the ultimate business reality. Careful preparation is essential when it comes to borrowing. It begins with a study of the financial requirements of your business and a matching of the appropriate loan facilities to those requirements. Once the financial requirements have been identified, you need to plan your approach to potential lenders prior to making the appointment to present your application - a well-prepared application will increase your chances of being successful. While a well-prepared business plan or loan proposal may be regarded as your passport to finance, your ability to obtain the loan on cost-effective terms that suit you will depend upon your presentation and negotiating skills in the loan interview. The Department of State Development has designed this guide to help you through the process of obtaining the most effective finance for your business. It contains a series of checklists to help you determine your financial requirements, identify sources of funding and prepare your finance application to a bank or finance company. In preparing to seek finance, as well as seeking professional advice (through your accountant and/or business adviser), you should also do your research online to find out what lenders are offering, and/or visit several lenders to ask them about their lending options. This will help you determine who is offering the product(s) you need on the best terms i.e. shop around for the best deal! Also see the following Department of State Development guides: Managing your cash flow Taxing your business Negotiate your way to success


01 Overview

Readers are advised:

• The purpose of this guide is to provide general introductory information.

• The guide does not purport to contain all the information that would be relevant to any particular business opportunity.

• The guide is provided to interested persons on the basis that they will be responsible for making their own assessment of that opportunity with the assistance of the information provided.

• All figures contained in the guide should be regarded as estimates only based on general samples and may be subject to error.

• The information in the guide should not be relied upon in substitution for professional advice and individual investigation.

• Persons interested in pursuing any particular business opportunity are strongly advised to fully inform themselves by taking professional advice as to the extent of their rights and obligations—particularly in relation to any proposed investment.

• The guide is provided subject to the terms of the formal disclaimer, which appears on the last page.


02 Determining financial requirements

WHAT TYPE OF FINANCE DO YOU NEED? There are three main categories: Property Finance – to finance the acquisition of a property, or to re-finance an existing property loan. Working Capital Finance – to finance stock, debtors and overheads in a business. Plant and Equipment Finance - for new or used plant and equipment, motor vehicles, furniture and fittings. The working capital requirements of most small businesses will revolve around five key elements: Stock, debtors, cash, creditors and bank overdraft. The following checklist outlines the major considerations associated with each: CHECKPOINT Aspect Amount required How it should be estimated

Stock Minimum necessary to support turnover.

Relate to turnover by dividing annual sales at cost by the number of times stock is expected to turn over each year (stock turnover).

Debtors Minimum required to support credit sales.

Relate to credit sales by multiplying estimated sales each month by percentage anticipated to be on credit.

Cash Buffer for incidentals and emergencies.

Relate to type of business and cash flow, e.g. if few cash transactions and ready access to short-term funds, cash on hand can be very low.

Creditors Maximum possible, while maintaining good relations with suppliers.

Relate to monthly purchases by multiplying estimated purchases at cost by credit terms allowed.

Bank overdraft

Realistic amount based on projected cash needs.

Relate to cash flow—bank will expect facility to fluctuate fully from maximum utilisation to position when overdraft is not used and credit funds are in the bank account.


02 Determining financial requirements In the initial assessment of capital requirements and the resultant level of borrowing required, it may be that the borrowing necessary will be high relative to the capacity of your business to service the debt. This may make it necessary for the financial requirements and business strategy to be reassessed. For example, second-hand equipment or a vehicle may have to be considered, the credit terms offered to customers may have to be reviewed, too much capital may be tied up in stock, an equity partner may have to be introduced or consideration given to contracting out certain functions.


03 Types of finance Once you have determined the type of finance you require, it is then important to select the right product to match. Generally speaking, short-term finance should be used for short-term assets, such as stock or debtors, and long-term finance should be used for long-term assets, such as property. Following is an overview of the most common types of finance facilities. SHORT TERM: TYPE DEFINITION ✓ N/A

Overdraft facility

A credit limit on a cheque account that provides the business with short-term funds for working capital. This is considered a short-term facility as the bank can withdraw the facility by giving the business notice (generally a month). Tips: • Ensure it moves from overdrawn

balance into credit regularly.

• Do not use for long-term funding purposes.

• Remember that an overdraft is repayable upon demand.

Short-term commercial bills

A form of commercial loan that can be structured on an interest only basis, or reducing basis, for short- term debt. Tips:

• Interest is payable in advance.

• Commercial bills are highly sensitive to interest rate fluctuations.

Bridging finance A loan facility that allows a new property purchase before the existing property is sold.

Letter of credit

A short term finance facility for import and export business usually negotiated in foreign currency. Tips:

• Banks can also advise on the creditworthiness of overseas buyers.

• Short-term and longer-term finance is available.


03 Types of finance LONG TERM: TYPE DEFINITION ✓ N/A

Commercial loan Loans for most commercial purposes such as property, working capital or plant and equipment.

Long-term commercial bills

A form of commercial loan that can be structured on an interest only basis, or reducing basis for long- term debt.

Commercial property loan

A commercial loan that is specifically written for property. This is normally a medium to long term loan.

Fully drawn A loan facility that reduces on a principal and interest basis over a fixed term.

Development loan

Loans tailored for developments that can be drawn down in progress payments as required up to an agreed total.

Hire purchase and asset purchase

A loan facility for plant and equipment that has a fixed term with fixed monthly principal and interest repayments and also may have a final lump sum instalment or “balloon” payment. Tips:

• You will need to provide a deposit.

Debt factoring A working capital facility with a limit based on a percentage of the debtor payments due to the business.

…CONTINUED


03 Types of finance LONG TERM…CONTINUED TYPE DEFINITION ✓ N/A

Leasing

A finance contract based on monthly rental payments in advance or arrears over fixed term with a “residual” payment due at the end. Normally used for plant and equipment and motor vehicles. Tips: • Working capital will not be depleted as

deposit is not required.

• Asset being leased becomes the ‘security’ in most cases.

• Negotiate repayment term up to five years, tailored to cash flow.

Mortgage loans

Purchase of land, buildings and other fixed assets. Tips:

• Interest-only loans are obtainable from some lenders.

Home equity A loan that is secured by the equity in a borrower’s home.

OTHER: TYPE DEFINITION ✓ N/A

Personal instalment loans

Purchase of motor vehicles, equipment and any other worthwhile purpose. Tips:

• Are usually made available for modest amounts and are repayable by instalments.

• May be secured or unsecured.


04 Major sources of finance Once you have determined the product(s) you are looking for, the next step is to find out who has those products on the best terms. The major sources of finance are as follows:

• Major Trading Banks—All of the facilities are available from the major banks such as National Australia Bank (NAB), Commonwealth Bank of Australia, ANZ and Westpac, Bank SA and Adelaide Bank.

• Finance Companies—Offer a good range of commercial plant and equipment products and working Capital facilities.

• Accountants—Your accountant may be able to arrange business finance on your behalf.

• Finance Brokers—A finance broker will arrange finance.

• Merchant Banks—Mostly for large transactions.

• Friendly Societies—Have a limited range of commercial products, but are competitive for personal lending.

• Building Societies—Have a limited range of commercial products, but are competitive for personal lending.

HOW MUCH WILL THE BANK OR FINANCE COMPANY LEND ME? This will depend on the quality of the assets being offered as security, but this table may help you to work out how much you can borrow: TYPE OF ASSET LENDING VALUATION RATIO (LVR)

Stock 20–50%

Debtors 20–75%

Plant & Equipment 20–100%

Property 60–75% Generally speaking, assets will score a higher Lending Valuation Ratio (LVR) if the bank can easily identify and sell them in the case of default in repayments. It is important to remember that the different LVRs are dependent on varying factors. Stock is dependent on how easy it is to sell, on what conditions the raw materials were sold to the business, the processing time from raw material to finished goods, and whether the stock may deteriorate quickly (an example is food related products). Debtors are dependent on their quality. If you deal with what are considered blue chip companies or Government, the LVR will be higher than if you are dealing mainly with small companies.


05 Developing the loan proposal PLANNING FOR FINANCE Planning for finance lowers the risk to the lender and allows you to ensure that as a business owner, you can adequately manage and appropriately utilise the finance you obtain. The key considerations of a finance plan should be:

• Can the business afford to make the principal and interest repayment on time every time?

• Has the bank enough security to recover the debt if the business cannot make the repayments?

• What is the track record of the business with lenders? These three components will be the most important consideration from a bank’s perspective, especially the track record of the business. The business banking manager will look at the past relationship they (or other financial institutions) have had with your business and whether you have been able to keep on track with loans in the past. This will then determine to a large extent, the trust the bank has with financial projections you have made in your application. The time, effort and expense incurred in preparing a well-researched and thorough business finance application are well worth it. There are four immediate benefits:

• It tells you where your business stands financially.

• It draws a quicker response from a lender.

• It is likely to result in a loan package which is tailored to the needs of your business.

• It helps to obtain the most competitive interest rate and fee structure available. Many lenders have a standard application form. While such pro-formas may not have to be used, the information provided should enable the lender to make an informed credit decision.


05 Developing the loan proposal DEVELOPING THE LOAN PROPOSAL CHECKLIST (refer to EXPLANATION NOTES on following pages) Details required by a lender to assess a business loan proposal: The purpose of the loan - Outline the following:

✓ Actions

• Amount and term of loan required. • What the funding is required for. • Who the loan will be paid to at settlement. • How the loan is to be repaid. • What security you are offering for the loan. • What the valuation of the security is. • Whether there is an independent valuation of the security or not. • Whether there are any contract details and if so what these are. • Whether there is a settlement date on the contract. • Facilities required.

Applicant details - Outline the following: • The borrowing entity. • The legal description of the borrowing entity. • Determine whether there will be guarantors and outline names and details of these people in the proposal. • The owners’ and managers’ details. • The contact details of your accountant and solicitor.


05 Developing the loan proposal DEVELOPING THE LOAN PROPOSAL CHECKLIST…CONTINUED Applicant details…continued ✓ Actions • Details of your current banker. • Determine whether legal documents are required in the proposal.

Business and industry details - Outline the following: • The management team. • Your products and services. • The history of the business. • Details of the market you operate in. • Resources and location of your business. • What plant and equipment and other resources your business currently owns. • Your competitors. • Where your business fits in the market in relation to your competitors. • Your key suppliers. • Your key customers. • Key staff and their roles within the business.

Financial details - Outline the following: • Financial statements • Cash flow projections. • Current borrowings and facilities. • Personal assets and liabilities.


05 Developing the loan proposal DEVELOPING THE LOAN PROPOSAL CHECKLIST…CONTINUED Financial details…continued ✓ Actions Security offered: • Real estate. • Plant and equipment. • Other assets. • Include details of any guarantees to be offered. Collateral business: You may wish to take advantage of other services the financial institution has on offer—this is value adding for the bank and may result in potential cost savings for your business. You may wish to investigate the following services and supply details of your current arrangements: • Insurance. • Superannuation. • Payroll services. • Investment advice. • Are EFTPOS or credit card facilities supplied? • Are on-line banking facilities supplied? • Are bank guarantees supplied?

EXPLANATION NOTES: Purpose of the loan: A lender will want to know in detail what you require finance for, as well as the terms and facilities you require. This includes:

• • Amount and term of loan required—How much you need and how long you need it for. What the funding is required for—who the money will be paid to at settlement and the breakdown of plant & equipment, working capital etc.


05 Developing the loan proposal

• Repayment source—Where the repayments come from. This may be from revenue from the business continuing at the current rate; perhaps from increased sales due to the purchase of additional capacity in the form of equipment, or it may be from reduced costs due to improved technologies within the business by the purchase of new equipment. It is important to detail exactly how the funds are being generated to pay for the loan.

• What security you are offering for the loan—The assets that are being offered to the lender as security for the loan. The following table illustrates the value of different types of assets:

TYPE OF ASSET LENDING VALUATION RATIO (LVR)

Stock 20–30%

Debtors 20–75%

Plant & Equipment 20–100%

Property 60–75%

It is important to remember that the different lending valuation ratios are dependent on varying factors. For further information, refer to the section on “How much will the bank or finance company lend me?” (Page 10).

• Valuations of security—What the assets to be offered as security are worth, and the details of any independent valuation. Independent valuations can be important, however, it should be remembered that they will cost the business money to obtain. In some cases the bank may request an independent valuation. Also detail whether there is an independent valuation of the security or not.

• Contract details—The details of any contract for the purchase of a property, business, or plant & equipment, with a copy provided in the application.

• Settlement date—What date do you have to pay the vendor, or supplier of goods.

• Facility type—What types of products or facilities are required. You may need more than one type of facility.

Applicant Details: Describe and explain your business; your history, your management skills and gaps, your financial details and track record etc. Provide as much information as possible and be honest with the lender.

• Borrowing entity—Details of the borrowers or the entity that is to be the borrower.

• Legal description of the entity—(i.e. ABN/ACN & ABC for a company, company structure etc.).



• Guarantors—The names and details of the individuals that will provide personal guarantees for the loans.

• Owners and Managers—The owners and managers names and details.

• Accountant and Solicitor—Contact details in case the bank requires further legal or financial information.

• Bankers—Current bankers’ details.

• Legal Documents—Examples—Copies of Partnership Agreement, Constitution of Company, or Trust Deed for a Trust.

Business & Industry Details:

• Management—Outline the management team and the structure and background of your business.

• Products and Services—What are you offering to the market?

• History—The track record of the business and how you came to be where you are today.

• The market—Outline the geographical location, size, growth levels, trends, and number of competitors in your market.

• Resources and location—Where the business currently operates from, and what plant and equipment and other resources it uses.

• Competition—Provide a profile of the competition, their capabilities, location, strengths and weaknesses and where your business fits in relation to them.

• Suppliers—The details of the key suppliers of resources to the business.

• Customers—Outline briefly your key customers (details of their value to your business).

• Key staff—Details of the key employees of the business and their roles within the business.

Financial Details:

• Financial Statements—Include financial statements for your business for the last three years.

• Cash Flow Projections—Supply projections for at least the next twelve months, particularly in regard to the purchase of new equipment, which should increase revenue and/or reduce costs.

• Current Borrowings—Detail the current facilities and terms of any borrowings against the business.



• Personal Assets and Liabilities—A statement of assets and liabilities of all guarantors.

Security:

• Real Estate—If your business is providing real estate as security for the loan, outline the legal description and address of the property.

• Plant & Equipment—If you business is providing plant and equipment as security for the loan, provide details of each item.

• Other Assets—Description of any other assets to be offered as security.

• Guarantees—Details of any guarantees to be offered.


06 Are you a good risk? Talking to a banker can seem difficult. A good strategy for dealing with a lender is to understand the qualities they are looking for. The following five areas are what most lenders consider. Before going to the lender it would be a good idea to make an inventory and itemise the qualities in the areas listed below. That way, preparation of your finance application can be more effective and questions likely to be posed at the loan interview can be anticipated. FIVE ‘C’S OF CREDIT – GETTING A BANK LOAN FOR YOUR BUSINESS An easy way to remember the critical factors in a business loan assessment is the approach offered by the five C’s: Character, Capacity, Capital, Collateral and Conditions. Note: Consult with your accountant to assist with your business planning and analysis of your operation as well as help you prepare the necessary financial statements. It is always good to start off on the right foot with your lender. The relationship will be for a long time. Character The lender is looking for such things as training and knowledge, experience, financial competency and plans for the future.

• Training and knowledge are examined in terms of education and understanding of the industry. As a manager you are called on to make decisions in the areas of production, marketing, finance and human resources.

• Experience cannot be under-rated. Direct experience under many different managers, as well as in other industries, gives a strong basis to be a good manager. It also gives a manager the resources often required when times get tough.

• Financial competency means that you can understand the importance of records and record keeping as well as how to use them to your advantage. Nothing frustrates a lender more than a person who doesn’t have a clue about the finances of the business. In order to understand the business, records and current records are necessary.

• Plans for the future indicate an attitude that will allow a lender to size up an operator. Are the plans well thought out and logical? What are the shortcomings? What are the strengths?

• The area of character can go a long way to help an operator achieve their goals.

Remember to sell yourself at all times so the lender can have confidence in your abilities. Capacity This refers to the ability to service the debt, replace assets as they wear out and provide money for living and possibly expansion.


06 Are you a good risk? • In order to do these items the business must have liquidity. Being liquid

means nothing more than to have cash or the ability to generate cash to meet ongoing commitments and expenses.

• Liquidity can also be referred to as working capital and is the difference between current assets and current liabilities.

• In order to have healthy liquidity we must make sure that cost control is exercised. Income must over time, be greater than expenses. Always remember that you must strive to get the most bang for your buck and that you can only spend that buck once.

Capital Here a lender looks at the operator’s financial commitment as well as how clearly he is personally committed. Personal commitment to the business includes lifestyle choices. Farming is not a turnkey operation and it takes someone of intelligence, ability and the desire to do a good job to be in charge at all times.

• Financial commitment is measured by the amount of money the owner is putting up as compared to the lender. In farming it is rare for a lender to put in more money than the borrower (50% debt to asset ratio).

• Even a huge net worth (assets less liabilities) may not be acceptable if the lender is more at risk than the borrower. As farms get larger, managers better and cash flows stronger, lenders will hopefully accept a lower percentage stake from the borrower.

Collateral This is also referred to as security. As a borrower you do not want to give the lender all your collateral if possible. This limits your ability to act without the lenders blessing. This could limit your ability to make other borrowing decisions on your own and reduce the speed by which you may need to take advantage of certain situations.

• The type of security determines the time it might take to sell in the event of bankruptcy. Lenders do not want to be business operators. Even if plenty of security is available, the time required to sell it can cause problems in the lenders mind.

• A healthy and strong cash flow is certainly something that lenders will prefer to collateral that is hard to liquidate.

Conditions Even if all criteria are passed, conditions may prevent a lender to forward a loan. Conditions generally include markets, consumer trends, economic predictions and environmental considerations.

• How accessible and secure is the market?

• Even if a market seems strong and secure, what are the consumer trends that may affect the business?


06 Are you a good risk? • We live in an increasing global economy. World-wide as well as local

economic outlooks are taken into account by the lender before he forwards a loan.

• Ever more today environmental restrictions, possible damage to the environment and past environmental damage can all prevent a loan.

• The positive thing that a borrower must keep in mind is that a lender needs to lend money in order to make money. The money in an account is a liability to the lender while being an asset to the depositor.

• A lender will decide if a loan is feasible, profitable and acceptable to you and the lender.

• Good communication skills to express goals and objectives to your lender and to explain how your plan is feasible and profitable will generally result in acceptance by the lender.

FIVE C CHECKLIST Character assessment

Honest, reliable, trustworthy

Integrity

Credit worthiness

Education, knowledge, experience and understanding of the industry

Business skills and acumen

Financial competency

Track record, if any, in business

Future business plans

Capacity assessment

Ability to service the loan and meet other commitments

Ability of your business to withstand a setback

Your capacity to exercise cost control and manage the business profitably


06 Are you a good risk? FIVE C CHECKLIST…CONTINUED Capital assessment

Financial strength

Quality of assets

Liquidity of assets

Debt-equity ratio

Collateral assessment

Your willingness to pledge security

Nature and acceptability of security offered

Adequacy of security

Conditions assessment

General economic outlook

Conditions in your industry

Implications for profitability and debt servicing capacity

Consumer trends

Explain business goals and objectives and feasibility and profitability

Environmental considerations


06 Are you a good risk? PRESENTING AND NEGOTIATING YOUR BUSINESS LOAN Action Tip Be prepared and thoroughly familiar with your finance application or business plan.

Follow the checklists above to ensure that you have gathered all the relevant information that may be required. Understand and investigate any tax consequences (see GST Checklist for Finance below). If you invite your accountant or business adviser to accompany you to the loan interview, answer all questions in the first instance. The lender will be seeking to appraise your business acumen and financial management skills.

Practise the language of the financier.

By adopting and practising some of the more common terms, you will be seen as an experienced operator, well-versed in things financial and an able negotiator.

Develop a firm appreciation of the value of your business to the financier.

Have, at your fingertips, full details of services utilised, services you may tap in the future and fee revenue generated by the lender as a result of its association with you. Use this information to win a point or obtain a concession when negotiations are under way.

Establish your negotiation strategy in advance.

Determine what aspects of the financing arrangement are highly important to you (non-negotiable), what aspects you are prepared to deal on or seek trade-offs (negotiable) and what you are prepared to give up early to demonstrate a spirit of co-operation (negotiating issues of low importance).


06 Are you a good risk? PRESENTING AND NEGOTIATING YOUR BUSINESS LOAN…CONTINUED Action Tip Determine the risk profile of your business.

Identify the weaknesses of your business and where it may be vulnerable in the eyes of a financier.

Negotiate the interest rate payable. Choose between a fixed or variable interest rate. If variable, link the interest rate to a market indicator. Advance sound reasons to minimise perceived risk and seek lowest risk margin possible. Choose any fixed term with care. Seek ability to convert in future from variable to fixed or vice versa.

Negotiate the repayment schedule. Determine an appropriate repayment term suited to your cash flow. Consider interest-only finance where appropriate. Ensure repayment arrangement is flexible. Remember that the greater the frequency of payment of interest, the higher the return for the lender. Check whether repayments are required in advance or in arrears.

Negotiate the security arrangement. Is the loan to be fully secured, partially secured or unsecured? Where secured, ensure the security adequately meets the lender’s requirements without being excessive.

Negotiate the amount of fees payable.

Determine once-only costs payable. Determine any recurring fees payable. Express fees as a percentage of the amount being borrowed to determine effective cost of borrowing. Be alert to prepayment fees if you repay a fixed-term loan early.

Negotiate other issues. Be prepared to negotiate the terms of settlement and covenants and restrictions such as future presentation of financial information, ability to borrow further etc.


06 Are you a good risk? PRESENTING AND NEGOTIATING YOUR BUSINESS LOAN…CONTINUED Action Tip Organise an interview with the financier.

Be on time and well-presented. Use the interview to demonstrate commitment, enthusiasm and business acumen.

Know where any deficiencies are in your proposal.

Be prepared to acknowledge deficiencies but answer related questions in a positive manner.

Maintain effectiveness of negotiation at all times.

Be positive but do not:

• become aggressive or argumentative.

• be over-optimistic and disregard the fact that all businesses have weaknesses and are vulnerable to risk

Be honest and expect the lender to have more faith in your business than you do.

Summarise the essence of your proposal at the conclusion of negotiations with financier.

Indicate concisely the present and future financial needs of your business and demonstrate that you wish to build a relationship of mutual trust and confidence. Ask for a decision date to allow you time to organize delivery, settlement or alternative arrangements.


06 Are you a good risk? GST CHECKLIST FOR FINANCE PRODUCT GST STATUS TAXABLE SUPPLY Overdraft Facility Input taxed No Commercial Loans Input taxed No Commercial Bills Input taxed No Commercial Property Loans

Input taxed No

Fully Drawn Advance Input taxed No Bridging Finance Input taxed No Development Loans Input taxed No Hire Purchase Principal is Taxable Yes

Interest is Input Taxed No Interest is Input taxed No Debt Factoring Input taxed No Home Equity Loans Input taxed No Leasing Taxable Yes Letters of Credit Input taxed No

HOW WILL I KNOW IF MY PROPOSAL WILL BE SUCCESSFUL? It must have these essential elements:

• Servicing Ability—Can I comfortably afford the principal and interest repayments on time every time?

• Security—Does the bank have sufficient security to recover its debt if I can’t make the repayments?

• Track Record—Have you been able to do what you said you could do in your dealings with banks in the past?

You can be reasonably confident of success if you have explained these elements in your proposal.


07 Maintaining a successful relationship with your financier The financier to your business, whether a bank or some other financial organisation, plays a pivotal role in its operations and success. For long-term stability, an unofficial ‘partnership’ needs to be developed between you and your financier. The following practical tips are offered to help you maintain good relations with your financier. CHECKPOINT Establish rapport and mutual confidence with the financier; if he or she is transferred, take steps to re-establish rapport.

Conduct all business affairs professionally.

Talk to the lender before making a formal application for loan funds; get to know the financier early before assistance is required.

Do all homework necessary; determine precisely what the financial needs of your business are. Display initiative when applying for finance but avoid being aggressive.

Keep your financier regularly informed on progress and developments with your business by providing accurate and timely financial information.

Invite your financier to visit your business premises.

Ensure your bank is competitive at all times; ask and shop around to make sure you are getting a good deal.

Discuss important matters in person rather than over the telephone.

If difficulties are encountered with a loan or a problem is foreseen, take the initiative and make an appointment to discuss the situation with the financier.

Finance is the ultimate business reality.

The financial requirements of your business are made up of working capital and permanent or fixed investment capital.

The fundamental principle of business financing is to match short term capital with short-term needs, medium-term capital with medium-term needs and long-term capital with longer-term needs.


07 Maintaining a successful relationship with your financier CHECKPOINT…CONTINUED

A comprehensive business plan or finance application is needed in support of any request for loan funds.

The information provided in your loan application should be adequate for the lender to make an informed credit decision.

A lender will assess your loan applications having regard to character, capital, conditions, capacity and collateral.

You can negotiate a cost-effective loan with a financier on terms and conditions that suit you with thorough preparation, knowledge of the financier’s language, an appreciation of the value of your business to the financier and application of a skilled negotiation strategy.


08 Crowdfunding – another source of financing your business Crowdfunding is a way of financing your business through donations of money from a large pool of backers’ (the "crowd") - usually via online crowdfunding platforms. Typically, you post a profile of your business project or idea as a ‘campaign’ on a website and ‘backers’ who believe in your campaign donate money to help you achieve your goal. On some websites, you need to set a monetary and a timeframe goal. To encourage backers you can offer rewards and incentives (‘reward crowdfunding’), such as acknowledgements, discounts, event tickets, gifts etc. ADVANTAGES OF CROWDFUNDING - can include:

• Unlike investments, you still own your business in full.

• It can minimise risk - if you don't reach your goal, you don't have to commit (dependent upon terms and conditions).

• A forum to interact directly with your backers.

• Instant access to market and product testing feedback from your backers.

• Free word-of-mouth marketing from your backers. DISADVANTAGES OF CROWDFUNDING - can include:

• Competition - with others seeking crowdfunding.

• Reaching your funding goal in the timeframe.

• Successfully marketing your campaign to secure backers.

• Interaction with backers and on-going promotion of your campaign can prove time-consuming.

• Providing backers with incentives and rewards. GETTING STARTED Crowdfunding isn't easy. Campaigns can fail for a variety of reasons including:

• Lack of planning/strategy before launch.

• No place in the market.

• Business idea/product development is insufficient to convince backers. Below are some critical factors: Planning To secure backers you need to clearly demonstrate:

• What the business idea/product is/its purpose.

• Why they need and should fund your business idea/product.


08 Crowdfunding – another source of financing your business

• The business idea/product development timeframe once your funding goals are achieved.

• The incentives and rewards available to them. Define and state your goals To set your backers expectations. Include:

• Your funding goal.

• Your funding timeframe.

• The business idea/product development timeframe. Not all crowdfunding websites will let you post your campaign unless you have a set funding goal and timeframe. Choose your online platform As there are a variety of crowdfunding websites you will need to research to find the one that best suits your business needs and understand their terms and conditions. Crowdfunding websites can differ in:

• The type of business ideas/products they accept.

• The audience they reach.

• Their requirements (e.g. some require you to raise funds within a set timeframe).

• Their fees (some have upfront fees; others only charge if you reach your funding goal).

• How they may help to promote your idea. Post your campaign You will need to give this careful consideration in order to ensure your campaign stands out, is unique and attracts backers. Dependent upon your finances, you may wish to consider seeking professional PR assistance. Keep in touch with and thank your backers Ensure you thank your backers and keep them informed of progress throughout. Respond to questions and feedback as quickly as possible and deliver the incentives and rewards you’ve promised them. Dependent upon the scope of your campaign, consider using social media. Above all, ensure that your supporters feel appreciated and important. This increases the likelihood of them marketing your campaign to others for free.


08 Crowdfunding – another source of financing your business

AT THE END OF THE CAMPAIGN Haven’t reached your goal? It is important from the outset that you understand the crowdfunding website terms and conditions. Some will let you keep the funds you have raised even if you don't reach your funding goal whilst others will not allow you to access any funds you raise unless you reach your funding goal. Can't implement your business? You will need to decide what to do with any funds you have raised. Options include offering your backers:

• A refund, or if this is not possible, informing them exactly how the funds have been used.

• Other incentives or rewards. If you are unable to deliver your backers the promised incentives or rewards then you should refund their donation in full, or they may be able to take legal action against you.


09 Notes


Department of State Development GPO Box 320 Adelaide SA 5001 T: +61 8 8226 3821 E: [email protected] W: www.statedevelopment.sa.gov.au/smallbusiness DISCLAIMER The Government of South Australia gives no warranty and makes no representation, whether express or implied, as to the accuracy of information contained within this guide or the suitability of the information for any purpose. Any use of the information contained in this guide (whether authorised or not) is at the users’ sole risk and the Government of South Australia disclaims responsibility for any loss or damage incurred as a result of such use. The information is provided solely on the basis that users of the information will make their own assessment of the accuracy of the information and users are advised to verify all information contained within this document. Any information about the law in Australia or South Australia is provided as general information only and is not legal advice. This guide is a starting point only and is not a substitute for legal or professional advice. While the Department has attempted to ensure the information is accurate at the time of publishing, no responsibility will be accepted for any errors or omissions and the Government of South Australia will not be liable for any loss or damage incurred by any person as a consequence of any use, reference or reliance on this information. Any such use, reference or reliance shall be at the sole risk of that person who should seek their own legal and/or professional advice if required. COPYRIGHT Produced by the South Australian Government © March 2015

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