THERE’S a widely held notion that small businesses are funded by the three Fs – friends, family and fools.
While the latter category is a nod to the high-risk nature of investing in start-ups and small business, estimates suggest that around a third of new ventures receive capital from friends and family.
The vast majority of business finance, however, is sourced through more formal channels.
Finance is more than just money; it’s the foundation of your business.
Understanding your finances will help you manage your money, improve cash flow, plan future growth, meet legal obligations, maximise profits and understand your business.
There are two main types of finance: Debt finance is money borrowed from external lenders, such as a bank while Equity finance involves investing your own money, or funds from other stakeholders, in exchange for partial ownership.
This could include crowd funding, private investors or venture capitalists.
Many banks and financial institutions have specialised services for small business.
There are many financial comparison websites, including Canstar, to help you compare financial products based on your business requirements.
Small business credit conditions have continued to tighten over the last 12 months as entrepreneurs struggle with falling housing prices.
About half of small business loans are secured by residential property, which means a reduction in house prices reduces how much small business owners can borrow against their houses.
There are other forms of debt finance like peer-to-peer lending matches people who have money to invest with people looking for a loan.
Loans may need to be repaid within a certain period and interest rates may vary according to the level of risk.
Purchasing goods using store credit through a finance company or store card can offer an interest-free period but does eventually attract high interest rates.
Whatever path you go down, but particularly when borrowing from a financial institution, it is important to demonstrate your viability with a business plan, marketing strategy and financial plan.
And remember to shop around for the best deal.
The SBDC website offers a wealth of advice on financial management, including publications on business finance and choosing a financial lender, along with business marketing plan templates to download.
The SBDC also provides a range of other services to the small business sector, from business workshops to advisory services and much more.
Visit smallbusiness.wa.gov.au or contact one of our experienced team on 13 12 49.