As a small-to-medium enterprise (SME), your business plays a vital role in the Australian economy. SMEs account for up to 98% of all businesses operating in Australia and hold the mantle as the largest employer of Aussies. However, nearly half of newly launched SMEs won’t make it beyond infancy. With red tape, access to finance, digital presence, local infrastructure and staffing presenting the greatest challenges to long-term survival and growth.

For many SMEs, revenue alone is often insufficient to meet funding requirements in those first few years. At some point, most businesses will require external financing to support continued expansion and growth. With a variety of avenues available to access funding, the more prominent options are business loans, government grants and programs, angel investment and venture capital, crowd funding, or invoice financing.

Business Loan

One of the most common ways for SMEs to access funding is via business loans from a bank or other financial institution. These loans can come in the form of term loans, which provide a lump sum of money, or a revolving credit facility. Two key advantages of taking on a business loan to fund your next phase of growth, or to manage the ongoing operations of the business, are having access to borrow the full amount required by the business and being able to match your repayment schedule to projected future revenue.

However, this type of funding is not without its drawbacks. Interest charges and other fees will create additional costs that need to be factored in when calculating the profitability and viability of any potential activities. As the default risk for growing businesses can be quite high during this stage of their lifecycle. Also, lenders will typically require proof of strong financial management and reporting, such as a good credit score, a consistent track record of revenue and profitability, as well as collateral on the loan. For many Australian SMEs, gaining access to the resources to create this level of accounting structure can be a sizeable challenge of its own.

Government Grants & Programs

SMEs can also apply for government grants and programs that provide funding and mentoring support to help Australian small businesses scale and grow. The Australian government offers a number of initiatives, such as the Entrepreneurs' Programme, the Business Growth Fund and the Small Business Digital Adaptation Program. These are a fantastic resource for SMEs, however, there is a lot of competition when applying for government grants and programs due to the sheer volume of businesses eligible to receive them.

Angel Investors & Venture Capital

Angel investors and venture capital firms are another potential source of funding for SMEs. These investors provide funding in exchange for an equity stake in the business. An added advantage is the set of expertise that comes along with the investment. However, there is a delicate balance to consider, as this can create too many cooks in the kitchen, and you will potentially relinquish some control over the direction of your business with more investors to answer to. Another consideration to make when selling equity in your business is the trade-off between a greater share in future revenue versus the short-term costs associated with other forms of financing.

But for your business to even be considered for an investment, these investors typically look for a strong financial track record, a clear and measurable plan for growth, and a scalable business model before engaging. Implementing accurate and consistent accounting practices to offer this real-time data may be difficult if not adapted into your processes early on.

Crowdfunding

For SME owners that are not particularly keen on handing over significant equity in their growing business, Crowdfunding may be a viable option. Crowdfunding is a method of raising funds from a large number of people who each contribute a small amount of money via an online platform, such as Kickstarter or Pozible.

The advantage of using platforms like these is that you may not need to hand over any equity in exchange for investment – sometimes it is a way for ‘investors’ to get first access to a new product or a significant discount on your products or services. But as this method is driven by the general public, it can be difficult to secure enough funding to meet your needs. You generally need to sell a lot of people who only invest a small amount, rather than landing a few big fish.

Invoice Financing

Another way for SMEs to access additional funding is through invoice financing. This type of financing allows businesses to receive cash from unpaid invoices and bills by on-selling its unpaid invoices to a third party. Although this method provides an almost instantaneous injection of working capital to fund operations and meet financial obligations as they fall due, it can often be the most challenging and costly form of financing for an SME. Firstly, to even be approved for invoice financing, the SME and its customers need to have a level of creditworthiness and strong payment history. Secondly, the interest rates and factoring fees charged for invoice financing are often considerably higher than other forms of debt funding.

So, if you own or manage an Australian SME and are taking steps towards how you can fund your next phase of business growth, we applaud you. You and your growing business are the backbone of the Australian economy. While there are a multitude of options available to help finance your business, each with its own pros and cons, you will need a strong position of financial management and robust reporting. Demonstrating to prospective lenders or investors your ability to deliver on objectives and grow profitably.

Would you like support in implementing strong and cost-effective accounting, bookkeeping and financial management practices within your SME? Or are you looking for guidance on bigger financial decisions within your business?

Aretex provides a cost-effective accounting and financial data management service. Giving you accurate, compliant and complete accounts, and less operating headaches.

Get in touch today - https://www.aretex.com.au/contact-us

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