Types of funding Ngā momo pūtea

Bootstrapping means starting a business using your own money. By keeping start-up costs low and using profit as the main funding source, you can bootstrap your new business without relying on bank loans or investors.

Bootstrapping works best for business models that:

• don’t involve heavy spending to start up
• have the potential to start making money quickly.

Pros:

• You keep ownership of your business.
• You have control over the direction you want the business to take.

Cons:

• Potential cash flow shortages.
• Without outside capital you may stunt potential for growth.

If you think bootstrapping might work for you, talk to a financial advisor or accountant first.

Asset finance is a loan to pay for a particular asset – for example, a delivery van. The lender buys the asset for you, then you pay them back in monthly instalments. The loan is secured against the new asset or existing assets. They’re usually shorter-term loans, from 6 months to 5 years. Make sure you understand the terms before signing anything.

Pros:

• Interest rates can be good if you go through a major bank and you won’t have to pay a big lump sum.
• Depending on the terms of your loan, you may be able to own the asset outright at the end of the loan period, upgrade it, or return it.

Cons:

• It can be more expensive overall to use asset finance rather than pay in one go.
• The whole asset isn’t tax deductible while you’re paying for it.

Also called crowd-lending, peer-to-peer lending can be less complicated than applying for a bank loan. Peer-to-peer websites such as Zagga and Squirrel help to facilitate these loans. It’s important to stay informed on all the terms of your loan.

Pros:

• Applying can be less time consuming than arranging a bank loan, and interest rates can be lower than banks.
• Loans are unsecured so you won’t need to use an asset for collateral.
• You usually won’t be asked to give up equity in your business.

Cons:

• Missed payments affect your credit score, just like a bank loan.
• If you have a low credit rating, interest rates can be high.

This is a popular way to get funding for creative work, but it’s also becoming a more common way to raise capital for entrepreneurial projects. Crowdfunding is similar to charity fundraising.

On a crowdfunding website, you:

• create an online campaign featuring your business, product or idea
• set a fundraising target
• get people to back your project.

 

Do your research to make sure you pick a credible crowdfunding website. You’re revealing your ideas to the public, so there are some risks to your intellectual property (IP).

 

Pros:

• Appeals can be launched with just a prototype product.
• Feedback can cast light on ways to tweak your product or service.
• Useful for market validation, as it shows people are interested in your product or service.

Cons:

• You might not hit your fundraising target.
• It’ll take time to put together a compelling offering.
• Going public means someone else might use your idea – make sure you protect your intellectual property.

Your personal network is more likely to trust you and accept your business case than other types of lenders or investors. But introducing money into a personal relationship can affect trust and the relationship itself, and you also won’t get professional support.

You should:

• select who you approach carefully
• make sure you formalise the arrangement with a signed contract setting out the terms and conditions – having it in writing will help prevent any misunderstanding or disputes.

Pros:

• Lower or no interest and more time to pay it back.
• No waiting for credit checks or approval processes – you could get the money quickly.
• Friends and family want to see you succeed so they might be more understanding if things don’t go exactly to plan.

Cons:

• Can cause strained relationships.
• Informal arrangements.
• Limited funding amounts – for example, friends and family may not be able to lend as much as you need to grow.

Cash flow loans are backed by your expected cash flow, not your assets. They’re usually used to help a business cover operating costs for up to a year.

If you’re new to business, loans might be the easiest way to get funding. You’ll still need to:

• do some groundwork to apply
• set time aside for business planning to make sure it’s the right decision for you.

Shop around for a loan that offers you the lowest interest rates.

Banks will need proof you can afford your repayments. If you’re new to business, you will most likely need to apply for a personal loan or extra borrowing on a mortgage. Once your business is more stable, you might have other options.

 

Pros:

• No need to offer assets as collateral.
• As your cash flow improves, you can borrow more.
• Even those with lower credit ratings may be eligible – if cash flow is good.

Cons:

• Higher interest rates and fees compared to bank loans.
• You may be asked to personally secure the loan, for example, against your house or car.

Payments are taken straight out of your bank account – tricky if your cash flow has peaks and troughs.

Business credit cards can be handy for covering short-term costs or getting through cash flow lows. Interest rates can stack up fast, and it’s easy to lose track if you’re not careful.

Your business credit card doesn’t need to come from the same bank you take a loan from or use for your personal finances, but it’s a good idea to build up a good history with one bank. 

Pros:

• Quick access to funds.
• Good for short-term costs.
• Some credit cards offer cashback or points on spending.

Cons:

• High interest rates if you don’t pay off the full balance each month.
• It can be easy to overspend.
• Not ideal for big costs or long-term investments, the interest charges can outweigh the benefit.

An angel investor is a successful entrepreneur who puts money into innovative new businesses, particularly those run by a person or team they believe in.

They typically pick businesses in their field of expertise so their knowledge and experience can help it succeed.

They might:

• loan you money, which you will need to pay back under their terms and conditions
• take a percentage of your profits
• ask for partial ownership of your business.

Pros:

• No obligations to the angel investor if the business fails.
• Angel investors bring valuable business knowledge and experience.

Cons:

• Giving up some of the equity in your business.
• An inexperienced angel investor could give poor advice or bug you for constant updates.

Learn how to get investors on board

Typically from a bank, secured loans require you to have an asset the lender can take if you can’t keep up repayments. The size of the loan depends on the value of your assets, including invoices, accounts receivables and stock.

Pros:

• Interest rates are lower than for unsecured loans.
• It builds a relationship with your bank – a good repayment history means future funding requests are more likely to be approved.

Cons:

• If you don’t keep up repayments, you could lose the asset used to secure the loan.
• A personal asset might still be used as security.
• Longer loans might have lower interest rates than short-term loans, but the overall interest paid might work out to be higher. Compare total repayments.

A set amount of credit - either time to pay a bill, or dollar amount - from a supplier or lender. You don’t have to use the entire amount. It’s like an overdraft managed in a separate account, or a revolving mortgage.

Your credit limit depends on your business, but it’s typically between 10% and 50% of the value of your cash flow.

Line of credit lenders like Spotcap prefer to fund those with experience – even if a business venture has failed, you learn from mistakes.

Pros:

• You’ll only be charged interest on the credit you use.
• There’s often no need to offer personal guarantees.
• It’ll help build your credit rating.

Cons:

• There can be high fees.
• If arranged through a bank, you may have to use a personal asset or director’s guarantee as security.

This type of crowdfunding involves offering part-ownership of your business, rather than rewards. Equity crowdfunding websites like Seed Invest and Snowball Effect connect business owners to potential investors.

Pros:

• You can sell shares without being listed on a public stock exchange.
• As it’s an offering to the public – with a low minimum investment, for example $250 – you might have a lot of shareholders.
• Good PR for potential customers and other investors.

Cons:

• There can be administration fees, and it will take time to put together a compelling offering.
• You’ll give up part-ownership of your business, and lots of shareholders means more administration.
• These aren’t strategic investors – they give you money, but not expertise or contacts.

Funding from profits means reinvesting any profits in your business. Make sure you forecast future costs and income model if it makes financial sense to spend your profits on the business.

Pros:

• No interest or dividend payments to third parties.
• Your money can earn interest until you spend it.
• It can be easier to quit a project when you don’t owe money.

Cons:

• Unexpected costs may eat into your profits, leaving you short of funds.
• You must set time aside to create a realistic forecast, and keep track of progress.
• It can take a long time to build up enough money to achieve your goal.

Venture capitalists are interested in commercialised growth businesses at this stage, especially those with annual turnover of at least $10 million and still growing.

Private equity firms look for businesses with annual turnover of at least $20 million, with proven business and cash flow models.

These investors often:

• put in large sums
• are more hands-on
• expect more control and ownership in return.

Pros:

• Can provide guidance and experience.
• They are a source of financing and potentially rapid growth.
• You don’t have to repay the money.

Cons:

• Loss of control and ownership status.
• They may expect an early return on investment.

These are loans that turn into equity later on, usually at a later funding round. Investors loan money with the understanding they’ll get equity in the company at a cheaper rate than later investors.

Pros:

• It’s cheaper to issue convertible notes than equity.
• Because it’s a loan, the valuation of your business is delayed until you decide to issue equity.
• You won’t have to give up control to investors.

Cons:

• Some investors don’t like convertible notes because of the lack of control over the business, for example, voting rights.
• It can be difficult for investors to work out if they’re getting a fair deal.

Trade finance is when a bank guarantees a supplier you’ll pay for their product. The guarantee is called a letter of credit. This is for businesses that trade overseas only – it’s common among importers and exporters.

Pros:

• The risk a supplier takes is covered by a bank, so suppliers will be more willing to work with you.
• It’s secure – the transaction goes through a bank.

Cons:

• There can be high fees.
• It’s only for international trading.