Getting Off the Ground: Funding Your Start-Up Business

Thursday, June 12, 2014

Major corporations like Mercedes Benz and, more famously, tech giants like Microsoft and Apple began in suburban garages. Most firms start from almost nothing and stay small, with one or two partners and maybe up to a dozen people with one idea that they hope will work.

There are an estimated two million small businesses running in Australia, from part-time home based 'micro businesses' to quite large operations, with sales of $10 million or $20 million.

All businesses need some capital to get going, and that's often where the first hurdle appears. Loans for business – even to those with good track records – have been hard to come by for several years.

“Sourcing funding, not to put too fine a point on it, is bloody hard for a start-up business,” says Peter Shaw, a director at the corporate advisory firm Ash Street.

And when I asked business advisor, Tony Kabrovski, from the accounting firm HLB Mann Judd, for his advice on funding a start-up, and how to manage cash flow finance to keep it operating, his first comment was: "Before you even start to think about that, you need to set out your 'value proposition'. It's not what you'll do in your business, but why you do."

Common wisdom was to reduce your business plan and value proposition to one page, have your budget given a reality check by several people and get your pitch right so you can explain to an investor why they'd be well rewarded by lending to you.

Even with a slick business pitch, a bank loan will usually require you to put up the equity in your home as security – assuming you have a reasonable amount paid off – which means that if the business doesn't do well, your home is put at risk.

Tony Kabrovski says some banks and equipment finance companies will extend loans for business up to, say $40,000, and maybe charge 18 per cent, along with including covenants against your family home. That means the home is not being put up as security, but you can't sell it without tipping off the lender that all might not be right with your business.


Hidden costs

Tony isn’t a big fan of cash flow finance options, like factoring and discounting, either, as they are very expensive and avoidable, but he said some of his clients find the lure of being paid the next day for their outstanding invoices, rather than fighting with their customers, worth the cost.

And now time for another reality check. Alexandra Tselios, publisher and start-up expert, advises new business owners that one way to avoid cash flow problems is have plenty of cash: "Assume that you will need to contribute a certain amount of money before you make any sales. Work out how much turnover you need to make and by what time before you're dead in the water, and then double that time."

There are many other costs you may not have considered in your budget: business insurance, setting up an accounting system, and don't forget that you won't have IT support unless you pay for it yourself. Also marketing, I've heard of a marketing campaign based on getting 'likes' on a Facebook page.


Very small business

If you've received a redundancy payout, buying into a franchise could be another option as banks are more willing to lend for that purpose – but they will still probably require you to put your home up for security.

And do your homework, or you could end up signed onto a business plan that was never going to work.

So what's left on the table? For a very sharp idea, especially a new gadget or piece of technology, you might attract the attention of an ‘angel’ or a venture capitalist. For that, here is Peter Shaw’s advice: "You have to have a realistic business plan and approach it with a heavy dose of realism.

"It must be well thought out, well-constructed, well considered. You can’t go in spruiking that you’re going to make millions straight away."

Another option is to borrow from family members to set up your business.

If you're thinking of this, my personal advice is to work in the same type of business you want to run for at least a year, and get to know the tips and traps. And for anyone reading this who's been asked for a loan by a relative, you know what to tell them.


Credit cards funding option

Literally while I was writing this, I was contacted by Oscar de Vries, who's been manufacturing his own range of natural shaving preparations called ‘OSCAR Natural’.

He was keen to explain that, with the help of a family investor and a credit card, he's been able to keep his business afloat for the last six years. "I work full-time at it, in fact it’s more like two full-time jobs," he said. "I always tell people to think really carefully before running their own business.  It’s a relentless existence."

"My financing requirements, that is, funding debtors, are quite high, but a lot of people should and could start their small business with a credit card," he said.

Here are Oscar's pointers to running a full-time business (now with one employee as he's started exporting):


  • "Don't even talk to your bank [about a loan]. Get a credit card with a decent limit and try to pay every bill on your card."
  • "Next, make sure you know the date the statement rolls over and make sure you pay your bills within reason the day after your statement cuts off, giving you another 30 days."
  • "Pay the bill in full and try to increase your limit over time and hey presto, no investors or bank manager required."


Through disciplined attention to overcoming his small business cash flow problems, and a bank that rewarded him for that, his $10,000 limit is now $50,000.

The lesson is this; there are awards to reap if you get creative about the way you source funds, remain financially disciplined and have a viable growth chart in place. 

If you stick to these simple truths, who knows? You could find yourself leaving that suburban garage and becoming the next Microsoft or Apple quicker than you ever imagined.