Raising Capital For Your Business - The Options

Written on the 25 January 2011 by Joe Olejnik

Business is booming, orders are flooding in, the phone is ringing off-the-hook… it all sounds great but there’s a problem – you don’t have the capital to support the growth. This is a very real challenge for many growing SME’s, so much so that it can destroy your business. However it is a challenge that can be easily addressed once you know your funding options.

So what are my funding options you ask? In short most SME’s have two options to fund growth above and beyond what can be achieved using in-house capital resources. The two options are debt funding and equity funding.

Debt Funding
When it comes to externally sourced capital most businesses automatically think of approaching their bank for a loan. However, since the credit-crunch, debt funding for SME’s has become extremely difficult to secure. Of late, the press has been filled with article after article on how tough the banks have become in their lending practices to Australian SME’s. These tighter credit lending criteria are not just limited to early-stage businesses – there are now frequent reports of well established companies that are not only being denied additional debt finance but are also having their existing credit facilities reviewed.

Prior to the GFC lending institutions already had in place rigorous ‘hoops’ that SME’s had to jump through in order to secure credit facilities such as an Overdraft. In most cases these debt-based facilities were required to be secured against assets owned by the company and where the company had limited assets then company directors were often required to put personal assets up as collateral to secure the loan. That was pre-GFC so you can image what is now required (both in terms of criteria and costs) to secure similar facilities.

So in short unless you have a well-established business, debt funding facilities to support growth might not be for your business at the moment. Even if you do manage to secure a loan facility, there is a dark-side to debt in that the secured nature of the loan can place at risk both your business assets and your own personal assets.

Equity Funding
OK, so what’s the alternative….EQUITY. Most SME’s are well aware of traditional debt funding (as discussed above) however many are much less aware that they can actually replicate their larger, listed-company contemporaries and raise capital by issuing shares to investors. Sounds interesting doesn’t it, so as a SME what equity capital raising options are there…. broadly you have three options:
1. Attempt to raise capital yourself
2. Venture Capital
3. The Australian Small Scale Offerings Board (ASSOB)

Raising Capital Yourself
Although it is possible to attempt to raise equity capital yourself this comes with some serious drawbacks:
1. You are very restricted in terms of who you can approach and how much you can raise
2. It’s costly
3. It’s a legal minefield
A number of recent legal cases have highlighted the risks. In one example a company in the property space raised $3M and was later found to have breached some of the capital raising provisions of the Corporations Act. The successful prosecution from this case and other cases have resulted in jail-time, the directors being forced to return all investor monies and winding up of the company. In short it is a legal minefield and you are highly restricted in how you can market the offer, who you can approach to invest and how much you can raise.

Venture Capital
Venture Capital firms play a vital role in supporting innovative Australian companies. The downside is they are extremely selective in terms of the companies they will invest in. According to the latest AVCAL Activity Report there were only a handful of companies Australia-wide that VC firms made new investments in during FY2010. The other factor to consider is that the VC investment model is often predicated upon taking board representation and often a sizeable ownership stake in the investee company. The flip side to this is that if you are one of the select few that gets a VC deal away very often the VC firm will have extremely well developed industry contacts that can ‘open doors’ for your business nationally and internally. In short it may be worth considering venture capital but don’t be too disappointed if you get knocked back – there’s only a few deals done in the VC space each year. For more information on venture capital visit www.avcal.com.au.

ASSOB
The Australian Small Scale Offerings Board (ASSOB) is the largest and most successful equity capital raising platform for unlisted Australian SME’s. Via ASSOB, companies are able to raise between $500K and $5M. Each company listing on ASSOB is actually undertaking their own private equity capital raising however this is conducted with the guidance of their own, professional corporate adviser (ASSOB Sponsors) and ASSOB itself. The primary function of the ASSOB capital raising platform is to provide the structure, processes and expertise to guide a company through each capital raising step in a compliant and professional manner.

To date over 200 companies have listed on the ASSOB capital raising platform and collectively raised in excess of $130M equity capital (from retail, sophisticated, high-net-worth and institutional investors). These companies have heralded from almost every sector including technology, junior mining, IT, finance, green / environmental technologies and food & beverage. Once a company has completed their capital raising, shareholders can potentially undertake a sell down (‘Exit’) of their shares through the ASSOB Secondary Sales system.

In order to list your company on the Australian Small Scale Offerings Board you need to use an Accredited ASSOB Sponsor. ASSOB Sponsors are external organisations that work with their clients in a corporate advisory role to assist the company get ‘investor ready’.

ASSOB Case Study: Preshafood Ltd
ASSOB has had numerous successes since it’s inception in 2004. One recent example is innovative food company, Preshafood (ASSOB:PRE), which listed on the ASSOB Primary Board and rapidly closed out their $1.5M capital raise. This is a typical example of the calibre of fast-growing companies Australia is producing and that require equity capital to unlock future economic prosperity and jobs for Australia.

Start Planning Early
For high-growth companies "cash is king." Don't let your success destroy your business. Prepare for growth and begin planning your capital raising activities early. Most importantly thoroughly investigate at all your funding options – both debt and equity.

Joe Olejnik
Joe Olejnik is the National Business Development Manager for the Australian Small Scale Offerings Board (ASSOB) – a proven capital raising platform that is dedicated to assisting high-growth, Australian business raise equity capital from investors. Joe is dedicated to supporting the national network of Accredited ASSOB Sponsors to list their clients companies onto the ASSOB platform.