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Methods of sourcing funding and investment

You may have savings, you might sell your collectibles, you might use some equity from your house. If you can find the money yourself that is usually an excellent source of funds as it means you are not beholden to anybody else.

This can be a good way to grow for a startup business that does not have many startup costs. You start small and grow the business as profits allow. This can be a lot safer than borrowing money or getting investment, but later it can slow potential growth or make it difficult to get capital that would help your business grow to the next level.

Bringing in a business partner can be a great way to bring in investment and expertise, but make sure that you have a solid legal agreement in place. Disagreements will occur and people do eventually choose to move on. You need to have considered ‘worse case scenarios’ before you start formally working together. Make sure that your expectations are aligned and that you have a method to deal with disagreements.

If your business partner is also your spouse then you need to be even more careful about setting expectations, responsibilities and establishing how decisions are made. An unresolved business disagreement can be disastrous for your home life.

This is a great way to lose friends and destroy family relationships. Make sure your eyes are wide open to what can go wrong if you accept money from family and friends. Make sure everything is in writing. We strongly advise getting legal advice and making sure that people’s expectations are set down from the start. While it can be easier than other methods to get loans or investment from people you know it can also come with misunderstandings and resentment if it goes wrong (or even if it goes right).

If you need to borrow money for your business, this is usually the best and safest option for a number of reasons. Firstly, banks require a lot of surety before they will lend you money. They will want to see a well-written business plan with a realistic cashflow forecast, even for an existing business. They will want to know that you will be able to pay their investment back. Good banks will work with you where they see gaps in your business plan and help you reduce any risk. In addition, bank loans are usually comparatively low interest and the bank is not entitled to any input in the day to day running of your business.

However, bear in mind that banks usually require some form of security or collateral before they will issue a business loan. This reduces the risk to the bank as it means if your business fails and you are unable to pay the loan, then they will take the value from the security you provide. If you have no assets to use as security then you could struggle to get the bank on board.

If you are unable to get a business bank loan due to a lack of collateral, another option may be a microfinance agency. These are usually not-for-profit organisations that are dedicated to helping people start out in business. They don’t require collateral, but they do require a robust business plan. Most microfinance organisations are focussed on helping people get out of debt and do not provide business loans. Auckland based Itirearea Collective provides business microfinance. We are not aware of any Canterbury based business microfinance organisations.

If you need to go to a finance company to fund your business then it may be time to rethink your business. Finance companies offer easy money with little security at huge interest rates. If you don’t generate the money that you think you will then you will quickly find the interest costs mounting up.

If you are willing to give up some of the ownership of your business, getting investors can be a good way to go but it is also difficult to achieve. Generally, investors want to put money into either something that is already generating income and is a safe bet, or they want to risk their money in ‘the next big thing’ but own a good proportion of the business in return for the risk they are taking. Investors will want to see that you are also putting your money and resources into the investment; why would they take a risk if you are not?

Investors can provide expertise, experience and access to networks and markets which could make your business much more likely to succeed. However, having investors will have a long term impact on your business as you repay the investment, make sure they get the returns they are expecting and possibly pay part of the profit of the business to them indefinitely. Having an investor on board may give you an initial burst of cash but might negatively impact the long term viability of your business. Some investors will push you to sell your business once it is succeeding in order to maximise their short term return.

If you are looking at getting investors on board, do your homework and make sure you are clear on what they expect for their investment before accepting an offer. You will also need to see a lawyer as there are lots of risks with getting other people involved with your business and you want to make sure all the legalities are in order.

Business incubators and accelerators provide guidance, direction and support for businesses in the startup phase, and are typically focussed on the tech industry.  Incubators and accelerators are a great method for developing your product and getting it ready for market, while building good connections and getting help from business experts. If you can get involved with an incubator or accelerator then this is a good option. Most incubators and accelerators have good connections with investor networks and can help you raise money.

There are a number of reputable business crowdfunding websites in New Zealand and this can be a good way of raising money for your business. To do it, you create an online campaign featuring your business or product and set a financial target. You will also need to consider how you will market or promote your campaign to draw potential contributors in.

Think about why people will put their money into your business. Will you offer product, rewards, shares in the business, permanent discounts? Make sure you factor in how this will affect your cashflow forecast. Crowdfunding is not appropriate if you are sensitive about intellectual property (such as if you are developing a unique product) and you do not want details of your product in the public arena.

If you are looking at using a New Zealand Crowdfunding Service then make sure they are licensed with the Financial Markets AuthoritySnowball Effect and Pledgeme are currently the most popular New Zealand services.

As a rule of thumb, don’t expect the government to put any money into your business. There are a few exceptions to this rule:

Te Rūnanga Ngāi Tahu offer mentoring and grants for new startups, growing businesses and those thinking of starting a business through their Puna Pakihi programme. Your business must be at least 50% owned by a registered Ngāi Tahu whānau to be eligible.

Poutama Trust offers grants of up to $10,000 for existing businesses that are at least 50% Māori owned at already generating at least $80,000 annual turnover.

Poutama take a flexible approach to how we can use their funding to invest into a business.  The key thing they look for is how the funding will help develop and grow a business over and above what they consider ‘business as usual’ activities.

A solid legal agreement is essential.
Organic growth is a good option.

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