Finding the right type of start-up funding is a rite of passage that almost all entrepreneurs have to face. There are a broad range of start-up funding models that your company could pursue, but it’s difficult to know which option is right – let alone realistic – for your business. That’s why it helps to have a solid understanding of how to finance a start-up company, including all the different ways that start-ups and SMEs can access capital. Here’s our guide to start-up business funding in Australia:
First and foremost, there’s bootstrapping, which isn’t technically a start-up funding model because it refers – very simply – to investing your own money in the business during the early stages. Not every business can and should find funding, but that doesn’t mean that the business doesn’t deserve a chance to exist. If you’re able to keep your overheads to a minimum and focus on expanding your client base, bootstrapping could be a good move, particularly because you won’t need to give up any ownership in your company.
Friends and family
Secondly, there’s the bank of mum and dad, plus any friends and siblings who might be prepared to bankroll your dreams of business success. This is probably the easiest form of finance to access, simply because your friends and family are less likely to grill you on your business plan or financial projections than seasoned investors. However, there are risks to this sort of early-stage start-up funding approach – namely, the potential difficulties associated with mixing your business with your personal life.
Government (or private) small business grants could be another potential option when it comes to initial funding for start-ups. Whether you’re in a potentially lucrative niche or your business just happens to be based in the right place (there are plenty of location-based grants just waiting for applicants), grants can offer your business investment capital without the need to give away any equity. Check out the government’s list of national/state grant schemes for a little more information.
Equity finance is the most well-known form of start-up funding. How does it work? Simple. Essentially, for a percentage of your company’s shares, you’ll receive a capital investment that can help finance R&D, payroll, marketing, and more. Although you’ll have to cede some control of your business, equity finance (particularly angel investment, a specific type of equity finance) will provide you with mentorship and networking opportunities, making it much easier to scale your company.
Another form of initial funding for start-ups is venture capital – a type of private equity investment for start-ups with a high-growth potential. One of the main disadvantages associated with venture capital is the fact that you’ll often lose a sizable portion of your company’s equity, and you may even have to give up majority ownership. Having said that, venture capital firms are often active and involved in the company, which could mean that you’re more likely to see success.
Becoming more and more popular with the rise of sites like Kickstarter, Indiegogo, and Patreon, many businesses are turning to crowdfunding to get their business ideas off the ground. While crowdfunding can be a great option for early-stage start-up funding, you may find it difficult to raise substantial amounts of investment capital on these types of platforms. This means that crowdfunding could be best utilized as part of a larger start-up funding model that also includes other forms of investment, like equity financing.
One of the most traditional options for start-up business funding in Australia remains the standard bank loan. While you may need to offer some form of collateral (unsecured commercial loans often have steep interest rates, so putting your assets behind the loan is often a good idea), bank loans don’t require you to give away any equity in your business. To secure a bank loan, you’ll need to provide an airtight business plan, as well as extensive accounting records from the business itself.
Finally, there’s accelerator funding, which is a less traditional, but still effective, start-up funding option. While accelerators (or incubators, which is the same concept except oriented around companies in a very early stage of growth) can provide some form of equity finance, the key benefits of these schemes are the networking and mentorship opportunities that they provide.
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