Funding and business finance

Why it matters

Funding arranged in a hurry is expensive. Owners who discover a cash gap with two weeks to spare end up with high-rate short-term products, personal credit cards or a desperate discount sale. Owners who understand their funding needs a year ahead negotiate properly, choose the right instrument for the purpose and often pay a fraction of the cost. Finance also determines who owns the business: taking equity when debt would have done, or debt when the business could not service it, are mistakes that cannot easily be undone.

Match the funding to the need

The first question is not “how much” but “for what, and for how long”. A permanent need, such as the working capital tied up in receivables and stock as the business grows, should be funded by permanent money: retained profits, equity or a long-term facility. A short-term timing gap, such as a seasonal stock build or a large job with a long payment cycle, suits an overdraft or invoice finance that is drawn and repaid. An asset that will earn money for seven years suits a loan repaid over roughly its useful life.

The common error is funding long-term needs with short-term money. An overdraft that is permanently at its limit is funding growth or losses, and the bank will eventually notice. Equipment bought on a credit card or from working capital leaves the business short for months. Make the term of the money match the term of the need.

Debt: what lenders actually assess

Lenders ask two questions: can the business repay, and what happens if it cannot. Capacity to repay is judged from historical profit and cash flow, usually two years of financial statements plus recent BAS and bank statements, and from a forecast that shows the repayments comfortably covered. Security is what the lender can recover: property, equipment, receivables or a personal guarantee from the directors. Most small business lending in Australia involves some form of director guarantee, which means the separation between business and personal risk is thinner than a company structure suggests.

The key ratio is debt service coverage: operating cash flow available divided by total loan repayments (principal and interest) over the period. Lenders want it well above one, so a bad quarter does not mean a missed payment. Different products suit different needs: equipment finance secured on the asset itself, invoice finance that advances a percentage of unpaid invoices, overdrafts for timing, and term loans for larger, longer investments. Compare the total cost, including fees, not just the headline rate.

Equity and non-dilutive sources

Equity means selling part of the business. It suits ventures that need significant capital before they can be profitable, where the upside is large enough to make sharing it worthwhile, and where an investor brings more than money. The cost is control and a share of every future dollar of profit and sale value; a business that could have funded growth from debt and retained earnings often regrets selling equity cheaply early on. Equity deals need a shareholders agreement, a realistic valuation and legal advice.

Non-dilutive funding is often overlooked. Customer deposits and prepayments fund work before you do it. Government grants and programs exist at federal, state and local level for things like export, research and development, energy efficiency and regional investment; they are competitive and paperwork-heavy but do not have to be repaid. Retained profit is the slowest source and the cheapest; a business that pays itself a fair wage and keeps the rest is building its own funding base every month.

• Equity: significant capital, shared risk, loss of control and future value. Needs a shareholders agreement and advice.
• Grants: competitive, specific purposes, reporting obligations. Check business.gov.au and your state government for current programs.
• Customer prepayments and deposits: the cheapest working capital available; build them into your terms.
• Retained profits: slow, cheap, strings-free. Requires discipline about drawings.

Prepare before you need it

Finance is easiest to arrange when you do not need it. Lenders see clean books, on-time BAS, a sensible forecast and a clear purpose, and they say yes at a good rate. Build the file now: two years of statements, a monthly reporting pack, a twelve-month forecast with the funding modelled in, and a one-page summary of the business and what the money is for. Keep your ATO account clear; tax debt is one of the first things a lender checks and one of the fastest ways to be declined.

A finance broker can save time and access lenders you would not find yourself, but understand how they are paid. SMBH Consulting’s funding strategy service helps owners work out how much they need, when, from which source and how to present it, working alongside their accountant and broker; the lending decision and the legal review stay with the professionals licensed to make them.

How to approach business funding

1. Define the need precisely What the money is for, how much, for how long, and what return it will produce.
2. Match the instrument to the need Permanent needs get permanent money; timing gaps get flexible facilities; assets get asset finance.
3. Model the repayments Add them to your forecast and check debt service coverage in a weak quarter, not an average one.
4. Prepare the file Statements, BAS, bank statements, forecast, purpose summary. Clean books and a clear ATO account.
5. Compare total cost and terms Rate, fees, security, guarantees, covenants and exit costs. Get more than one offer.
6. Take advice before signing Accountant on structure and tax; lawyer on guarantees and any shareholder agreement.
7. Report to your funder Send agreed reports on time. A funder who trusts you is cheaper and more flexible next time.

Real-world example

A Geelong fabricator funds a new machine the right way

Corio Fabrication is a steel fabrication business with eleven staff and $2.1 million in revenue. The owner, Pete, wants a $180,000 CNC plasma cutter that will cut subcontracting costs by about $70,000 a year and win work he currently turns away. His first instinct is to pay for it from the working capital account, which has $210,000 in it, until his bookkeeper points out that $60,000 of that is GST and super due in six weeks and that receivables are running at 48 days.

Instead he prepares a file: two years of statements, a twelve-month forecast with the machine’s savings and repayments included, and his last four BAS, all lodged and paid on time. He compares equipment finance from his bank and a specialist lender, choosing a five-year chattel mortgage secured on the machine itself, with repayments of roughly $3,600 a month that the forecast covers more than twice over even in a slow quarter. The working capital stays in the business, the machine pays for itself in under three years, and the bank, having seen the quality of his reporting, offers an overdraft facility he did not ask for but accepts as a buffer.

Common mistakes

• Funding long-term needs with short-term money A permanently maxed overdraft or equipment bought on credit cards. Match the term of the money to the life of the need.
• Borrowing in a crisis Last-minute finance is expensive and the terms are poor. Arrange facilities while the business is healthy.
• Selling equity when debt would do Giving away a permanent share of profits to solve a temporary problem is the most expensive money there is.
• Ignoring the personal guarantee It puts your personal assets behind the business regardless of structure. Read it and get independent advice.
• Approaching lenders with messy books Unreconciled accounts, late BAS or ATO debt lead to a decline or a punitive rate. Fix the file first.
• Not modelling the repayments A loan that fits the average month and breaks in the quiet one. Test coverage in your weakest quarter.

KPIs to track

• Debt service coverage ratio Cash available for repayments divided by repayments. Keep a comfortable buffer above 1.0 in every quarter.
• Debt to equity Total borrowings divided by owner equity. Rising steadily means growth is being funded by lenders rather than profits.
• Weeks of cash cover Spendable cash divided by weekly outgoings. The lower it gets, the more a facility matters.
• Cost of funding Total interest and fees as a percentage of average debt. Compare across facilities and renegotiate when it drifts.
• Facility utilisation How much of your overdraft or line is drawn on average. Permanently high means it is funding something it should not.

Frequently asked questions

Should I use my home as security for a business loan?

It usually lowers the rate and increases what you can borrow, but it puts your home at risk if the business fails. Weigh it carefully, consider what the business could survive without, and take independent legal and financial advice before committing.

What is invoice finance and when does it make sense?

A lender advances a percentage of your unpaid invoices and is repaid when the customer pays. It suits businesses with reliable commercial customers and long payment terms. It is flexible but relatively expensive, so it works best as a bridge, not a permanent crutch.

Are government grants worth applying for?

For the right purpose, yes: they do not have to be repaid. They are competitive, specific and come with reporting obligations, so the effort must match the amount. Start with business.gov.au and your state government’s small business agency for current programs.

How much equity should I give an investor?

It depends on valuation, how much you raise and what the investor brings beyond money. Giving away control or a large share early can be very costly if the business succeeds. Get a realistic valuation and legal advice, and compare the all-in cost against debt alternatives.

Key takeaways

• Decide what the money is for and for how long before deciding where it comes from.
• Match the term of the funding to the life of the need; permanent needs want permanent money.
• Lenders assess capacity to repay and security; clean books and a clear ATO account are your best negotiating tools.
• Equity is the most expensive money if the business succeeds; use it for needs debt cannot meet.
• Arrange facilities while the business is healthy, and model repayments against your weakest quarter.