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The big picture: choosing how to fund your business

Peter Langham 9 minute read

Raising equity is relatively easy, provided you have the required working capital, writes Peter Langham

When I started a debtor finance business in 1998, I knew I had to have all the funding I needed to grow the business, fund clients and pay the bills. Once I was comfortable with how much I needed, I had to decide on what types of finance would support the different cycles of the business.

As a new business, we needed sufficient funds to support any application to a bank, which would be called upon for working capital to grow the business.
There was no war chest to call on – no massive equity balance in some property. Therefore, we needed to raise capital from investors.

Interestingly, investors were very happy with the business plan, but they all wanted to know where the working capital was going to come from.
The result was a massive effort convincing a bank that if the capital was raised and if we achieved certain goals, that bank would provide that working capital. Once we had that, raising the equity was relatively easy. This lesson has continued through to today, as our start-up business evolved into a large one. Over the years, we have had different banks support our growth, although the bank that supports us today has been there for 10 years – raising equity has never been a problem.


So the lesson has to be: working capital is king. Get it right and the sky’s the limit. When businesses turn to their brokers for advice on funding options, they are looking at you as they would look at an old-fashioned bank manager – someone they can trust and seek advice from. Therefore, it’s essential that brokers are across all funding options for the various situations business owners find themselves in.

Here’s just a few ways to get the working capital required to pay the day-to-day bills, including the ATO, and to fund growth.


If a business is getting paid quicker than it has to pay suppliers or wages, make the most of it. If a business can extend payment terms, do so – not to delay the inevitable, but to better manage the cash flows. Even if the supplier charges more in the early days, it’s worth it. Later on when cash isn’t an issue, negotiate better terms.

Debtor finance (invoice finance)


Wherever possible, use a business asset as security for funding – don’t risk the home. What a business is owed by their customers is an asset that should match the day-to-day liabilities of the business. Hence debtor finance, where you use the debtors for a line of credit for up to 80 per cent of those receivables, is an ideal tool for funding these day-to-day needs.

Debtor finance is a line of credit that grows in line with business revenues, offering business owners the peace of mind associated with not having their family home on the line. Smart use of the extra cash now available – for example, to get better prices for stock purchases or to get discounts by paying invoices more quickly – can offset some of the costs involved in running a facility. There are an increasing number of specialists offering this form of finance, so finding the right solution is a lot easier.

Bank overdraft

A typical overdraft facility will require real estate security, and for many business people, this means using the family home as collateral for business credit, as opposed to having the business support itself. This should be the cheapest funding option, but it only works well when the working capital requirement does not exceed the value the bank attaches to the real estate security.

If the equity is finite but the business is doing well and growing, the overdraft may not be able to keep pace and could put pressure on the business.
If the working capital available is limited as a result, the owner has to consider the opportunity cost to a business of turning away orders.

There is also the relationship with the bank to consider, as continually bumping up against the overdraft limit can give the false impression that the business is struggling.

If you have the working capital from one of the above sources, then you may need to look at capital funding. This can be used to establish a business or invest in property and/or equipment to make the business better.

Property mortgage

Banks love property as security. Because the equity component is fixed, so should the repayment period and amounts be, matching the borrowing requirements.
This can be used for several purposes including developing property, buying business premises, extending existing business premises, along with commercial and residential investments.

Repayment periods typically extend from 10 years up to a maximum of 30 years. It is possible to access commercial mortgages with very short repayment periods – some as low as two years. Some lenders also offer interest-only payments for the first two years, and some will allow up to two payments per year to be deferred.

A commercial mortgage should not be used to inject working capital into a business to fund stock, wages and debtors, as the repayment period is not aligned with these current assets.

Equipment finance

There are plenty of options to fund those pieces of equipment that support the business. Banks are the main providers, but there are many other specialists. You can even find specialists to fund various situations. Terms can vary, but really should match the ability to make repayments and the life of the asset being purchased.

Venture capital

Typically an option for start-ups and small businesses investing heavily in research and development (R&D), venture capitalists take an equity stake in businesses with medium to long-term growth potential.

An important source of funding for fledgling businesses that do not have access to the capital required to fund the R&D phase, it requires the business owner to relinquish part of the ownership and control of the business in return for the risk taken by the investor/s.

Private equity

This is similar in principle to venture capital, but is usually an option for established businesses that have significant growth plans.
It can also play a role in enabling a business to complete a merger or acquisition or to conduct buyouts of public companies that result in a delisting of public equity.

Private equity investments can involve long holding periods to create sufficient time for an initial public offer to take place or a sale to a public company, and in some cases, to affect a turnaround.

For business owners and their advisers, it really boils down to identifying the most appropriate funding structure that will support the current and future needs of the business, taking into account owners’ plans and preferences around ownership, control and the use of personal assets to secure facilities.

The big picture: choosing how to fund your business
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