Today I wanted to start by talking finance. I guess it is a major barrier to many business ideas getting off the ground, where does the money come from to start? In a recent government report into small business, over 15 sources of start up funding were identified. The link to the report is here http://www.innovation.gov.au/smallbusiness/keyfacts/Documents/AustralianSmallBusinessKeyStatisticsAndAnalysis.pdf
It would be of no surprise that it was found that 72% of start ups used personal savings as a major source of funding. The next highest contributor was personal credit cards. Again not a huge surprise.
Personally secured bank loans, followed by personal loans and overdrafts are the third and fourth highest contributors to start up funds. What this highlights is the conservative nature of financial institutions and the lack of support entrepreneurs receive. It is easier to get a loan to go on a holiday that it is to start a new business venture. A couple of the big four banks have advertised heavily over the past two years regarding how pro-business they are and how much money they have to lend. As yet this has not made a real impact on the overall funding of business.
What I did find surprising that was only around 7% of start ups accessed government grants when all flavours of governments have made available significant resources for businesses over the past few years. I wonder how much of this money is being accessed and the results that it has brought for budding businesses? The money is there and even though there are criteria to be met, I don’t think enough businesses are making the most of this opportunity.
In general offering equity to friends, family or private investors is used by no more than 5% of start ups. Loans from the same groups are used much more often. I find this interesting because I successfully used the strategy of equity from family and friends to fund my initial start up. This also allowed me to access more bank funding to kick the venture off. The investors received a very good return on their investment and I was able to mitigate the risk of loan repayments while building our cashflow and profitability.
My main messages are three fold.
Firstly, there are many sources of finances – use a mix of as many as you need to get your business up and running.
Second – Don’t be discouraged if you walk into a bank for a loan for your new venture and they say no. It does not mean your idea is no good and it does not mean your business is over.
Third and final message – One of my first mentors is a property and investing expert from the USA called John Burley. He tells a graphic story of pigs getting slaughtered that has stuck with me for nearly 15 years. The message is simple, watch what the masses are doing (the pigs) and then do the opposite because pigs get slaughtered in the market (remember most small businesses don’t survive). In this situation if most business ventures are being funded by personal savings, credit cards and loans, look for opportunities that the majority are missing which could be government grants, private equity or something even newer like crowd funding.
We will explore these options next time.