Main sources of finance
There are a number of options to finance setting up or growing your business. These range from self-finance to borrowing from various sources, to applying for grants and other funding.
On this page
- Self-financing
- Getting money from a bank
- Financing from friends or family
- Grants and other funding
- Tips for sourcing finance
Self-financing
You could use your own money to set up your business, or use money from within the business to grow your business. Most business owners start out by committing their own funds as equity or capital into the business.
If you hope to attract investors into your business, at some stage, they’ll want to see that you have a substantial stake in the success of the business. Why should they put their money at risk if you’re not prepared to back your business idea with your own money?
Capital injected into the business by the founder(s) typically comes from:
- Personal savings.
- Equity built up in the family home and released for business use through a mortgage (existing or new).
These funds are usually the cheapest form of finance and the easiest to secure, because the bank has the home as collateral (security) for the loan.
It’s also possible to gain expansion capital from within your business by:
- Building up your working capital through business growth.
- Increasing your cash flow through better management of your debtors and creditors (for example, improving your debt collection and getting better credit terms from suppliers) and by better stock management (for example, not having too much surplus stock).
- Factoring your receivables (selling the debts you are owed to a factoring house).
- Increasing your business debt.
Getting money from a bank
The most common source of funding is bank lending and most businesses make use of bank loans in some form or another.
Find out more about what banks are looking for when you borrow money.
Financing from friends or family
Another common source of funding for business people is to approach family and friends for money. This could be in exchange for either interest payments or a share of the ownership. Of course, this money is often the most dangerous – you do not want to lose family and friends if your idea does not take off according to plan and things turn sour. But they could also share in your success!
Grants and other funding
If your business qualifies, there are a number of grants, awards, subsidies and funding sources you can access. For example, there are funds to help you:
- Obtain specialist advice or go on training courses.
- Access overseas technology or equipment you might need to fill a technology gap.
- Address key technical or technological risks in your product or process development.
- Access training and advice to help you build your business or technical skills.
- Develop an export market.
You’ll have more 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. Help is also available for Maori and Pacific island people.
To find out more on grants and other funding, visit New Zealand Trade and Enterprise or read up about business grants for Kiwi businesses.
Your business idea might be attractive enough to warrant external funding from an angel investor or a venture capital company. They will exchange funding for a share in your business. There is more information in this article on how to raise capital for your business.
Tips for sourcing finance
If you’re looking for business funding, don’t forget to mention the fact to your lawyer and your accountant. Both of these professionals are likely to have a wide range of business contacts through their client lists and are, therefore, likely to be aware of people interested in investing in promising businesses.
There are additional advantages in approaching these professionals.
- Your accountant will have some knowledge of you, your business and its prospects and will, therefore, be well placed to serve as a possible advocate for, or advise you against, seeking investment.
- The funding process is likely to be less formal, drawn out, and laborious than it might be if you were to go through other, less familiar, investment channels.
- Your accountant is well-placed to advise you on preparing your business case for investments and on strengthening any weak areas in your business.
Make sure you talk about your business ideas to people within your professional and social circles. People who may be able to help you with useful information, or money, can only do so when they know you are looking for finance.
Explore all your options and pursue all possibilities before choosing the most appropriate financial option for your business.
- This information is provided by New Zealand Trade and Enterprise
