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What type of finance is best for your business?
If you're looking at starting or growing a business, organising the right finance is vital. If you need funding, you have the option of equity or debt finance. Here are some key things that you need to consider when deciding what type of finance best suits you.
How much do you need to borrow?
The first thing you need to know is how much money you'll need. You can get an idea of this through a number of different methods:
- If you're starting a business - add up your set-up costs such as rent, equipment, shop fit-out, inventory, wages and KiwiSaver contributions (including your own), legal and accounting costs
- If you're purchasing an asset - ask for a copy of the contract with the purchase price
- If you're borrowing for cash flow purposes - use cash flow forecasts to identify any shortfalls
A financial plan is an important supporting document if you want to apply for a bank loan or other types of debt and equity finance. Our guide to writing a financial plan is a great place to start as it will give you an idea of your cash flow and how much you need to borrow. To reduce financial stress, if it looks like you need to borrow a larger amount, you may want to consider ideas that can save you more money or, if you can, keep working your existing job for extra income.
Equity finance
Equity finance is investing either your own or someone else's money into your business. The key difference between debt finance and equity finance is that the investor becomes a part owner of your business and shares any profit the business makes.
The main sources of equity capital are:
- Family and friends
Your personal network is a common way to raise funds in the early stages of a business. Keep in mind - introducing money into personal relationships can result in misunderstandings and disputes, so consider who you approach carefully - Angel investors
These are private individuals who invest their own funds into start-up businesses - Crowdfunding
This type of funding relies on people to donate money to a business, similar to a charity. Some businesses looking for funding offer incentives, like gifts or company shares, in exchange for their money. Keep in mind that you're revealing your ideas to the public, so this may pose a risk to your Intellectual Property (IP) - Venture capitalists
These are firms that manage funds on behalf of investors and have dedicated capital to invest in high-growth businesses in exchange for a share of the company. You could research capital firms that specialise in your type of business to find the right Venture Capitalist to suit you
Considerations
- Accepting investment funds from family or friends can affect personal relationships
- You may have to compete with a number of other businesses for funding from the same source, making it harder to get the cash you need
- Shared ownership means you may have to give up some control of your business. Investors not only share profits, they may also have a say in how the business is run
Debt finance
Debt finance is borrowed money that you pay back with interest within an agreed time. The most common types include:
- Bank loans
- Overdrafts
- Asset finance
- Credit cards
- Equipment leasing and hire purchase
Advantages
- You have control over your business and assets as you don't need to answer to investors
- You don't have to share your business profit with equity shareholders
- Some interest fees and charges on a business loan may be tax deductible - your accountant can advise you on this
Considerations
New businesses may find it difficult to secure debt finance without accurate financial records or projections and a comprehensive business plan.
- You'll need to generate enough cash to service repayments, fees and interest
- Regular repayments can affect your cash flow. Start-up businesses often experience cash flow shortages that may make regular payments difficult
- If you use an item as security to guarantee a loan, the item could be repossessed should you be unable to make repayments
Are you eligible for government assistance?
Before you go down the route of borrowing money, you may be eligible for some assistance from the government, provided you have a viable business idea. Government agencies offer a range of support, from mentoring and grants, to capability and skills building - to help small businesses succeed. Visit business.govt.co.nz for more information on government support for small businesses.
Look for professional help
For more information on how to proceed with debt finance, take a look at our applying for finance guide or set up a meeting with an ASB Business Manager to discuss your finance options.
For additional guidance on other finance options, an accountant can help you assess your prospective financial position and ensure you've thought through all potential income and expenses.
You don't have to go it alone - there are plenty of places to turn for guidance. If you're looking for how to source advice or support for your start-up, visit business.govt.nz for information on business advisors, business groups, networks and mentors who may be able to help.
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If you need help to figure out what type of business lending and level of funding you need, talk with your accountant or get in touch with us and talk to someone from our specialist team.
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This page is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and should not be relied on. This information has been prepared without considering your objectives, financial situation or needs. We recommend you seek independent professional advice and contact Inland Revenue before acting on this information.
