Small to medium-sized businesses, up and down the country, are under varying degrees of financial pressure at the moment.
Having readily-accessible finance is now more critical than ever.
Watch the video summary here.
Whether you’re treading water and wanting to stay afloat, or if you’re expanding your current product or service offering, here are some financing options you may want to consider:
The Government has several existing and newly-introduced initiatives targeted at SMEs, including:
Small Business Cashflow Scheme: Under this scheme, SMEs with 50 or fewer employees can apply for an interest-free loan of $10,000 (and an additional $1,800 per full-time employee) to cover core business operating costs (e.g. rent, insurance, utilities or rates).
Business Finance Guarantee Scheme: SMEs with revenue between $250,000 and $80 million should consider this scheme – it allows them to apply to their banks for loans up to $500,000, for a period of up to 3 years.
Regional Business Partner Network Support Scheme: Under this scheme, SMEs with fewer than 100 full-time employees can apply for a Government grant of up to $5,000 through the COVID-19 Business Advisory Fund.
Grants: There are additional pre-COVID-19 grants available from the Government and their agencies, most notably R&D grants, regional growth grants, grants for exporting products and services, and specific industry grants from the Ministry for Primary Industries.
Debt financing might be the way to go, particularly for SMEs reluctant to share ownership in the company. Some of the more common sources of debt funding are as follows:
Commercial banks: Bank loans are the most widely-adopted source of debt funding. In return for providing financing, banks will typically charge interest on the principal amount advanced and take security over the borrowing company’s assets. Note that banks will generally also require a personal guarantee from the borrowing company’s directors.
Finance companies: Businesses that can’t access bank financing may want to consider funding from finance companies or other non-bank financial institutions. Many finance companies offer unsecured finance options. Others offer invoice discounting or factoring-based finance options, in which unpaid invoices or accounts receivable are used as collateral to secure a loan. Note, however, that finance companies typically charge higher interest rates than those of commercial banks. This reflects the greater level of risk associated with a finance company’s lending activities, and the higher cost of funds to finance companies, generally.
Debt securities: A company could look to issue debt securities to investors (e.g. bonds, bills, or convertible notes) as another way of raising finance. With this approach, investors are essentially lenders who provide the company with a repayable investment loan.
Other: Other sources of debt financing include friends, family, and existing shareholders, each of which will present its own issues
A well-established approach for a company to raise capital is to issue new shares in the company, to existing and new shareholders (e.g. friends, family, angel investors, venture capital firms, other institutional investors, etc). This might be an appealing option where taking on more debt is not financially viable. The two most common types of share issued by companies include:
Ordinary shares: This is the most basic and widely-recognised form of company ownership unit. An ordinary share generally gives its holder the right to vote at a meeting of shareholders. It also usually gives the holder the right to a share in company dividends and the distribution of surplus assets of the company on the company’s liquidation.
Preference shares: A preference share will not normally give its holder a voting right in respect of the company. However, it will give its holder a ‘preferential right’ over holders of ordinary shares – typically, the ‘preferential right’ is the right to receive dividends, the distribution of surplus assets on liquidation, and the distribution of proceeds on a sale, ahead of ordinary shareholders. (Preference shares can also be ‘convertible’ into ordinary shares or ‘redeemable’ (i.e. able to be re-purchased) by the company. Each classification will present specific benefits and downsides for the investor and the company.)
Pause and consider: When looking to obtain finance, we recommend you pause and carefully consider what trade-offs you are being asked to make with your business (e.g. how much of a stake in the business, or how many directors, do investors want?). Also consider what kind of obligations you are being asked to sign up to (e.g. what are the repayment terms of your loan? Can you justifiably give security over your assets? Are you in a position to provide a guarantee?)
Applicable laws: You should be clear that your capital raising is being done in accordance with applicable laws. For example, if your company is issuing new shares, you will want comfort that it ticks all the boxes under securities-related legislation, including the Financial Markets Conduct Act 2013 and, if applicable, the Overseas Investment Act 2005 (i.e. if capital is being raised from an overseas investor and relevant thresholds under the Act are triggered). There are significant penalties for breaching these laws.
Advice: We recommend you seek legal, financial, and tax advice, as soon as possible, in connection with any financing activities you are planning.
We reiterate that this isn’t intended to be an exhaustive list of all financing options available to businesses – it’s merely a snapshot of some of the more common approaches you may want to consider.
Please feel free to contact us with any financing questions you may have, and remember to sign up here to be notified of future posts in the ProAct series.