Once you’ve decided where you want to grow your business, the matter of where to get the money from arises. Generally SMEs have four options available to them; personal equity, a bank loan, angel investors and venture capitalists. Westpac’s Martin Brennan says it comes down to personal choice.
Personal equity
Firstly, you can reach into your own pockets to finance your growth, such as taking out a loan against your house or from personal savings and investments. Brennan says there are good and bad sides to this option. “Ultimately, personal equity gives you control. You’re accountable to no person. Personal equity also leads to less expectations of return. But the more personal equity you’ve got in a business means that money isn’t available to do other things you want to do.”
Bank loan
Banks give businesses loans if they believe in it. While you must pay it back (with interest), you still keep 100 percent ownership of the business. “My view and I have a bias, is that with bank debt there is a guaranteed exit price. In other words, you borrow $100,000 and you know exactly how much it costs to, in effect, pay out that partner.
“Equally, a bank doesn’t want to have a stake in your business. Debt I’d say to people is the opportunity to keep control of your business.”
Angel investors
Angel investors are people prepared to invest in a promising business. They usually are already familiar with the industry.
“Angel investors are only for the bigger end of medium-sized businesses,” Brennan points out. “Unless they saw potential like a new invention, it would be problematic to get them onboard. I would only go to them if you felt you had substantial growth opportunity.”
According to New Zealand Trade and Enterprise (NZTE), angel investors’ expectations are usually at least a 30 percent return on their money and often want some equity (ownership) in your business to offset their risk. The advantages of having angel investors are that you get the cash right away and can start growing. On the other hand, you must be completely comfortable with only owning a part of your business.
Venture capitalists
NZTE says venture capitalists are investment companies or fund managers that give cash in return for part-ownership of your business. They provide more money than an angel and will also provide expertise, support, contacts and management help.
In return for risking their funds, they tend to favour only high-growth companies that are likely to provide them with high returns.
They plan to realise their gains on exit from the investment.
NZTE says some investment firms are only going to want to give you money, provided you follow all the rules to the letter. This can be a little bit difficult, especially for a business that is just starting out and needs a little bit of leniency so that they can grow to their full potential. Although the money that you get from one of these firms can certainly help your business, if they are too restrictive, it can also tie you down considerably.
“Venture capitalists tend to look for an exit strategy in one form or another of that business, so if you were looking to work with a venture capitalist you would have to buy into that strategy of an exit over a 3-5 years timeline. It might not be suited if your aspirations were longer term,” Brennan says.
He usually asks his clients if they have seen the popular reality TV show Dragon’s Den. “That’s a good snapshot of what angel investors and venture capitalists will put you through. You need to decide how much of your ‘baby’ you want to give up.”
Brennan says businesses need to see an investment, whether it’s a bank loan or money from an angel investor or venture capitalist, as a partnership.
“Do it for the right reasons, not just for need of money. Build good sustainable long-term relationships. Generally I’m a great believer that it’s about partnership and you must get that balance right. For most low-end SMEs it’s (financing growth) really an equity and debt solution. In my experience, it’s how much do you want to partner with people for what that mix is.”
Other words of wisdom Brennan has learned from a long career of working with SMEs are that good things take time. “Don’t grow too quickly and without a sound foundation. The analogy I use is it’s like trying to put a third story on a house that’s designed for one floor.”
Useful websites
www.business.govt.nz
www.angelassociation.co.nz
www.nzvca.co.nz
www.nzte.govt.nz
www.bmnz.co.nz
www.frst.govt.nz
www.thesmallbusinessgame.co.nz
www.businessresourcecentre.co.nz
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