Becoming finance ready

toolkit2

Becoming Finance Ready

Prospective investors will expect to be presented with an Information Memorandum that provides them with a detailed understanding of your business and why you require funding. The VicMETS template for download suggests one way, amongst many, of constructing an Information Memorandum. It is important to do your research, know your audience well and obtain professional advice where necessary.

  • Executive Summary
  • Business Overview
  • Industry/Market Overview
  • Customers
  • Products/Services Overview
  • The Team
  • Competitive Landscape
  • Financial Highlights
  • Investment Thesis
  • SWOT Analysis and Risks
  • dollar-bill

    Sources of Finance

    It is often said, ‘you need to spend money to make money’. For a typical SME, this spend may be for capital equipment, skilling-up the workforce, or pursuing new business development opportunities.

    However, for some SMEs, accessing finance is not a simple task. A Deloitte Access Economics study for the NSW Business Chamber in 2013 estimated that roughly 10% of Australian SMEs (translating to around 50,000 businesses in Victoria) experience difficulty in accessing finance.

    The study also indicated that access to finance is the most common barrier to innovation, and around 30% of SMEs felt that they had missed a good business opportunity due to the lack of availability of credit.

    The following tableprovides an overview of the different sources of finance available to SMEs, the benefits and drawbacks of each and some useful guides on how to make a pitch for investment finance.

    Source of finance

    Personal

    Pros

    • Demonstrates ‘skin in the game’ for future investors
    • Not required to dilute holdings
    • You own the business
    • All profit/dividends goes to you

    Cons

    • All losses are yours to bear

    Source of finance

    Friends & Family

    Pros

    • Access to low or non-interest loans
    • Flexibility of investment terms

    Cons

    • Potentially serious relationship consequences if business fails
    • Generally do not bring relevant expertise

    Source of finance

    Debt Financing
    Banks, Specialists, Debt Brokers

    Pros

    • Once qualified, it’s a fast way to raise capital
    • You stay in control of the business
    • No dilution of equity in the business
    • Interest payments are tax-deductible

    Cons

    • Personal guarantees means personal risk
    • Qualification process can be difficult
    • Loan agreements can vary in complexity and need to be carefully assessed
    • Will require covenants relating to financial indicators that can be onerous

    Source of finance

    Debtor Finance

    Pros

    • Debtor finance companies provide up to 85% of the value of invoices without requiring a charge over the assets of your business

    Cons

    • Generally a more expensive form of funding than traditional bank finance secured by a property

    Source of finance

    Equity Financing
    Angels, Venture Capital, Private Equity

    Pros

    • Generally active investors that bring knowledge, expertise, and a well-established network
    • Interests are aligned to see the business succeed
    • Can enhance the reputation of the business

    Cons

    • Will dilute your holding
    • Will expect to be a decision maker (e.g. board position)

    Source of finance

    Government Grants
    State Government, Federal Government

    Pros

    • Many options for government grants, loans and other schemes
    • Not required to dilute holdings

    Cons

    • Time consuming to complete applications
    • Bureaucratic hurdles and milestones can be a burdensome

    Source of finance

    Customer

    Pros

    • Customer provides debt or equity finance if they see the business as a supplier of key importance

    Cons

    • May mean that the customer asks for advantageous terms from the business, e.g. ‘most favoured nation’ status

    Download the Information Memorandum Template



    Download the Business Plan template