- More than 97.4% of all Australian businesses are small. With so much competition, you need to grow to survive.
- Some of the biggest brands in the country grew from alternative funding. Atlassian survived the startup phase by using credit cards.
- With a business credit card, you can earn rewards for everyday transactions and business purchases to grow your company.
Small business is big business in Australia, with the most recent ABS figures showing we’re home to more than 2.1 million startups and small businesses. And with 97.4% of all Australian businesses being classified as ‘small’, it’s fair to say they are the backbone of our economy.
But despite huge swathes of entrepreneurs dipping their toes into business ownership each year, the success rates leave much to be desired. Almost two in three shut their doors within the first three years due to a range of factors, from too much competition to no engagement with customers, to the biggest one of all: poor finances.
Overcoming the odds
So how do the other one in three businesses stay open? Is it their work ethic, their ability to predict fluctuations in the market, or just dumb luck? Actually, it’s their ability to stay on top of their cash flow and use peaks in their profits to grow their company.
This brings us back to that old mantra: you’ve got to spend money to make money. And when it comes to surviving in the cut-throat world of small business, it’s often a fine line you have to tread between investing in growth and pinching your pennies for seasonal troughs.
The good news is that there are plenty of different ways to fund your business growth. Even the biggest players in the market have looked to alternative funding methods in their startup days – just ask the billionaire co-owners of Atlassian, who used their own credit cards to keep their burgeoning business alive way back when.
So aside from the obvious, what are some of the most common reasons why owners might want to grow their business?
Boost profitability: Are you ‘just getting by’ every quarter? Do you feel like you’re putting in more and more effort every day but the bottom line remains static? The answer could be you’ve hit a plateau and need to hire more staff (or widen your offering) to boost your profitability.
Career satisfaction: Everyone – no matter what they might tell you – needs a goal to strive towards. Without any real target, we’re simply treading water. For small business owners, their long-term goal is to be a market leader in their industry, and the career satisfaction that brings is enormous.
Personal financial needs: If you’re about to start a family, looking to invest in property or simply want to build up your nest egg for retirement, growing your business could be the way to earn the necessary funds.
Fend off the competition: It’s hard enough as it is to get ahead in any industry, but especially so when the market is very crowded. Sometimes growth is the only way to stand out from your competitors – whether that’s franchising to new suburbs, expanding your online offering or even buying out the competition.
Inflation: This unstoppable beast has been the death of more than a few startups and small businesses over the years, and if you don’t pay attention to the market you may be swallowed up sooner rather than later. It’s wise to keep in contact with your financial advisor or accountant about what inflation is doing, and consistent growth could be the antidote.
Four ways to fund your own business growth
So, you’ve decided it’s time to grow your business. The reasons for doing so don’t really matter – as long as you are certain it’s the right choice and that now is the right time.
The good news is you have a few options at your disposal. No, you don’t have to rely on the banks to hand you a loan, although that could be the best path for you, after considering your situation.
Consider these four ways to fund your business growth:
1. Reinvest your own working capital
If you’ve studied business at uni or taken a short course on running a small business, you’ve likely been slapped in the face with this mantra more times than you can count.
But there’s truth to this Business 101 tactic. After all, pouring your own money back into your business means you aren’t at the mercy of the repayment terms of a bank or credit card provider.
Sure, it might be hard at first to realign your thinking on this. If you’ve been enjoying the fruits of your labour – and seeing your bank balance rise month-on-month – it could be a challenge to go back to your base wage and instead spend any excess profits on growing your business.
But look at it as a long-term investment in your future. By growing organically, you reduce the risk of failure and won’t have to cough up loan repayments (plus interest!) every week, fortnight or month. Instead, you can use the time you would have spent convincing a lender to give you a business loan in formulating a growth strategy.
This option isn’t for everyone, and it’s only recommended if you have enough ‘excess profits’ to pour back into your business without impacting your own lifestyle. But if you have the money on hand then it could be your golden ticket to easy business growth.
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2. Apply for loans for bigger investments
Despite Commissioner Hayne recommending changes to how lenders provide loans to both homeowners and businesses, there’s nothing wrong with going to a bank to help you grow your company. In fact, it’s often the simplest route to getting funded.
But it’s important to plan out your growth strategy before approaching a lender. This will allow you to get to grips with all the associated costs for growth, and you’ll be able to put forward your business case knowing you have the right loan figure in mind. Think about some of the following costs of growth:
Increased rent or mortgage (if moving premises or adding another franchise)
Higher utility bills
Bigger staff wages
More advertising and general marketing spend
Potential costs of additional departments (e.g. HR, IT, marketing)
Market research expenses
For big investments, in particular, it’s crucial that you have a solid business growth strategy that you can show to your lender. Without one, you run the risk of looking unprepared – especially if you haven’t studied the market before applying for the loan – and therefore being rejected.
3. Explore an overdraft (line of credit)
Depending on how long you’ve been in business, your profitability and your expected turnover in the coming year, you could be eligible for a line of credit from your chosen lender.
This overdraft feature essentially acts as a flexible supply of funding. Once you’ve got your line of credit, you can borrow as and when you please and make repayments when needed. The biggest plus is that you only pay interest on the outstanding balance. So if you get a $10,000 overdraft account and draw down $2,000 of that, you’ll only pay interest on that drawn-down amount, rather than the whole $10,000 (which you would incur interest on from day one if it were a standard bank loan).
As mentioned, the difficulty is that you need to be a reliable and profitable business already, so it might not be for everyone. Then again, if you’re looking to grow your business you should already be in a moderately healthy financial position.
4. Use credit cards and charge cards
Did you know that many entrepreneurs bootstrap their way to startup success with credit cards? They are easy to use because most people already have a personal card, and depending on your credit limit you can make business-relevant purchases while waiting for customers to pay you, and then pay it all off once your cash flow is back to normal.
In saying this, liability is an issue when using your personal credit card to fund your business growth. Not only because you are entirely responsible should you default on repayments – as opposed to the company when using a business credit card for an incorporated business – but it’s risky if you have employees on your team who will need to make company payments with your credit card.
The alternative is to get a business credit card. Not only does it offer more benefits to you as a business owner when using it to fund your organisation’s growth, but it can be linked to a range of rewards systems. That means you keep earning points even when conducting regular business transactions. Here are a couple of examples:
Membership rewards: You can earn Membership Rewards Ascent points for every purchase (plus a sign-up bonus of 100,000 points) with the American Express Platinum Business Card.
Overseas bonus: You can earn triple points when travelling overseas or making overseas purchases from home with the NAB Rewards Business Signature Card.
Take care of your personal credit score
There’s a good chance that lenders will look at the personal creditworthiness of business owners before deciding to extend credit to the business itself (and a 100% certainty if the business is not incorporated), so you need to maintain a healthy personal credit score. If you’re not sure what your score is, use our free credit score tool to find out.
And if you think your score is not strong enough, take advantage of some handy tips to improve it. A good personal credit score is your first stepping stone to business growth, no matter which funding route you choose.
Are you looking to fund your business’s growth in the coming months? Or have you already grown your business through one of these methods? Let us know how you funded your company’s growth by commenting below.