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Financing growth using other people’s money

Module 6: Knowledge framework for growth

Many CEOs fund growth by using their own money. Perhaps they are conservative, or don’t want to justify their decisions to anyone, or don’t want to go in debt for fear of losing the business. They are bootstrapping their way to growth, by investing their earnings back into the company, growing a little bit each year.

But there are also many ways to fund growth using “other people’s money”. Sometimes the opportunities that are opened up by having more funds and getting more people vested in your success can accelerate growth and shorten the time required to achieve success. Take a look at some of the options available to you:

There are also many ways to fund growth using “other people’s money”

Debt financing

Debt or equity financing can be as simple as going to an individual (friends and parents are common options) or a financial institution (bank), providing them with a business plan, discussing how you’ll use the money, and how you intend to pay it back – with interest.

Perhaps you want to buy a new building, or some machinery, or expand into another state or country. You may need to provide collateral (access to your savings, property, or some other way for the loan to be “secured”); your business plan will need to be sound; and you’ll need to agree to regular reports. But if you have good character, good collateral, and a sound business plan with pay-back provisions, you’ll have a good chance of getting the money you need.

Grants

Another option is to apply for state or federal grants. In Australia, we pay taxes – some of which the government redistributes in the form of various types of grants that help certain kinds of companies grow. Again, you’ll need a business plan, an indication of how the funds will be used, and what outcomes you expect. The good news is that you don’t need to give up equity or pay back the grant – but you do need to do your best to deliver the outcomes you promised the people of Australia when you accepted the grant.  Visit www.business.gov.au/assistance for Australian Federal Government grants and support.

ANZ Business Growth Online Program presented by Dr Jana Matthews, Australian Centre for Business Growth at UniSA. Part of the knowledge framework for growth module.

Vendor or landlord financing

Sometimes CEOs can get financing for capital equipment, or even for new facilities from suppliers, vendors or landlords, depending on the length of the commitment you are willing to make in relation to using the equipment or renting the premises.

Another option is to apply for state or federal grants

Equity financing

Companies with high growth potential may want to explore equity funding. If you have an exciting idea, a disruptive technology, or have had a prior company success, individuals (commonly known as ‘angels’, sometimes as ‘sharks’) may be willing to give you money in exchange for a percentage ownership of your company.

Companies with high growth potential may want to explore equity funding

Angels usually provide their own money in the form of seed funding. Venture capitalists invest funds entrusted by pension, insurance or retirement funds, and come in after the seed round of equity financing.

Each time you sell equity, you dilute your percentage of ownership, but a smaller percent of a company that grows large is much better than 100% of a small company that never grows – or grows very slowly. And if the company fails, then you, the angels and venture capitalists all share the pain; you do not have to pay back anyone for an equity investment.

It’s important to understand that fewer than 1% of all companies are venture financed. And once you take other people’s money in exchange for equity, the clock is ticking. Your company will either end up in an IPO or a trade sale – it’s the only way investors will be able to get their money back (plus a bonus for the risk they took for investing in your company).

Each time you sell equity, you dilute your percentage of ownership

Stock market

A small number of companies that are growing quickly or have disruptive technology will be able to list on the stock exchange and make their shares available to a larger number of people – the public. This provides a way for the founders to take some ‘money off the table’ and a large number of people to share the risk of funding the continuing growth of the company.

Trade sale

Another way a company can get more money for growth is to sell to a larger company with more money, staff, systems, marketing reach, and customers which could enable your ‘company’ to achieve its growth potential. Sometimes merging or being acquired can actually facilitate new growth.

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