From venture capital to small scale money lenders, Nicole Azzopardi looks at the alternatives for finance in today’s economic climate.
Your oven is on the blink and the catering van is showing signs of serious wear and tear. The Federal Government’s new tax break of an extra 50 per cent tax deduction could help you buy that new piece of kitchen equipment, but a serious cash injection is needed if that’s going to happen. A loan would really take the heat off, but the major banks are not going out of their way to help.
“There is no easy answer when it comes to dealing with the issue of financing,” family business expert Philippa
“At the moment it seems that everybody wants your first-born child for collateral. It’s this type of problem that will send many small businesses to the wall in the next 12 months. Banks are generally exceptionally wary of lending to businesses at the moment.”
So what are the choices?
Option 1: Join forces.
Venture capital offers a way to take in a partner to help get that cash injection your business needs. Times may be tough but there are savvy people out there looking for a good business to invest in.
“There are people out there who are keen to invest and don’t trust the share market at the moment,” Ms Taylor says. “It doesn’t have to necessarily be someone with previous experience in hospitality, but someone who is business-canny and doesn’t expect a quick return.
“According to information shared by some economists, we have only seen the tip of the iceberg with unemployment. Some of these people may not want to buy a business but are interested in buying themselves a job.”
But when getting into bed with a partner, expectations need to be clearly articulated. Be sure to have a strategic plan ready and updated, as well as a business plan which illustrates when you expect to see a return and what kind of return that would be.
Option 2: All in the family
If you are going to borrow money from friends and family, take a business-like approach rather than asking for a favour. This potential source of finance may be inclined to invest more patient capital—that is, capital that does not require an immediate return.
“Asking a parent or friend for a $5000 or $10,000 loan can put them in an awkward position and can be embarrassing for you if you don’t do it right,” Ms Taylor says.
“If you do want to take that route, show them the business plan and a strategy and give them some expectation as to what repayments will be. Then make sure you are able to repay them, and if appropriate, offer them a cut.”
Profit sharing with family investors can be a deal sweetener but be careful not to make the deal unrealistic, Taylor warns: “When people expect profit to be modest it’s easy to say, ‘I’ll give you 10 per cent’. This may be well out of kilter with what the actual loan was. Better to suggest something like 10 per cent in the first year, seven per cent in the second, down to two per cent in the third year.”
Often, one of the biggest potential challenges with taking on an investor could be their expectation to have the right to a say in your business.
“People don’t necessarily want the investor having the right to meddle and tell them how to run their business,” Ms Taylor says.
“On the other hand, some astute investors can be an asset in offering wise advice. You need to be clear about the investor’s expectations as well as his capabilities. Ask yourself, is this someone you want buying the right to participate in decision making?”
Option 3: Small to medium money lenders.
There is a wide range of credit providers ranging from a bank to an insurance company or other lending organisation. For example, Ausvance is a company that will give you an alternative solution to obtain a cash advance. They are incorporated in the US, with offices in Sydney and Melbourne. They have no affiliation with R&CA—we are using them solely as an example of a capital provider.
According to their website, Ausvance can provide restaurateurs and caterers with up to $200,000 based on their future EFTPOS/credit card sales alone. To qualify for a cash advance, the borrower needs to process $5,000 per month in EFTPOS/credit card sales.
No matter who you look at, all money lenders will provide advice on money management; however, they have products and services to sell so they will try to persuade you to use their products. And no matter who you decide to deal with, be careful. Use only the products that suit your particular needs.
Before signing any contract, it’s crucial you shop around for the best deal and read the paperwork thoroughly.
When choosing credit, consider talking to family and friends about their experiences with different lenders. Another important thing to do is check out the interest rates, fees and charges the banks, credit unions and finance companies are offering. You can generally find a list of interest rates in the money sections of your local newspaper.
Don’t automatically take the credit suggested by a salesperson. It may not be the best deal. And don’t fall for low interest rates without checking out fees and charges. Some offer an attractive interest rate for the first three months and then hike it up, making things more costly overall. Finally, read the fine print and find out what happens if you don’t meet repayments on schedule.