Investor Funding for SMEs: 6 Key Questions to Ask Before Seeking Finance

Investor Funding for SMEs: 6 Key Questions to Ask Before Seeking Finance

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  • Trying to secure the capital to start a business can be exceedingly difficult for budding entrepreneurs.
  • Over 60 per cent of small businesses in Australia cease operating within the first three years of opening. Unless you can inject the cash into your business, it can be very difficult to grow and prosper.
  • There are various options when it comes to investor funding for SMEs, but you'll have to think very carefully before you decide which type of funding is best for your business.
  • Read on to find out the six most important questions to discuss with your financial adviser before seeking any type of business finance - and how to go about attaining it.

Securing finance for your small business venture can take substantial time and feel endlessly frustrating.

The average Australian business can wait for more than a year before achieving their funding goals. Meanwhile, some highly sought-after businesses may find themselves getting finance in no time at all.

Many aspiring entrepreneurs turn to their own savings to fund their businesses (also known as 'bootstrapping’), or to friends and family. These sources are less time consuming to seek out and interest rates for repayments are low.

But such sources are usually in short supply, forcing entrepreneurs to look elsewhere for the cash injections their businesses need to grow and prosper.

You may have expertise in a sought-after field, or see your product or service as the ‘next best thing’. However, unless you have sufficient finance to self-fund your business dreams, whether or not you can bring them to life is going to come down to how well you can present them to would-be investors.

What questions should I ask before seeking business finance?

Here are 6 of the most important questions to ask yourself (and your financial adviser/s) before deciding which type of funding is best for your business, and how to go about attaining it.

1. Is it really so difficult for a small business to secure investor funding?

Yes and no. It can be exceedingly tough to secure funding as a small business. Sadly, more than 60 per cent of small businesses in Australia cease operating within their first three years of opening. Ask for a show of hands and you’ll find an entrepreneur who has had a tough time raising capital to grow their business.

But don’t despair! The Australian Financial Review reported in 2019 that “[n]early one-fifth of Australian venture capital firms wrote cheques of an average size of between $5 million and $50 million in the past 12 months.”

As an entrepreneur or small business owner, you will face many challenges on the road to investment, but at the end of the day, you simply need to be able to convince others that your idea is a solid investment.

2. How important is funding for small business?

A small business without funding will struggle under the weight of its own expenses and debt. The money you need to pay for staffing, rents or mortgages, core materials, your office supplies, and whatever manufacturing or IT equipment you need to operate – these all cost money, and the money has to come from somewhere.

Seed money must be raised to get the business started. This can come from any number of different sources: from an investor, a small business loan or the owner's savings, commonly known as bootstrapping (but more on that later).

As far as financing is concerned, SMEs can explore several options, starting with conventional bank loans, investment firms, or investments from family or friends. Investors looking for a good rate of return are out there, and many are looking for somewhere to put their money. Your business could be just that thing.

3. Do I need an adviser?

Almost certainly, yes. Unless you have a background in the field, seeking and applying for funding will be more achievable with assistance from an expert. Advice and guidance is very important.

4. What should I look for in an adviser?

A good adviser will have a variety of skills and attributes that will help you out a lot when seeking funding.

Make sure they have current, relevant certifications. Ask for references. Look online for testimonials. You want reassurance that your advice is coming from someone qualified – and experienced – to give it.

The recent Banking Royal Commission has been a wakeup call for the industry as a whole and has provided potential investors, entrepreneurs to consider their financial advisers’ general standard of care. It's important that before you enter into a professional relationship with an adviser, you do your due diligence.

A good adviser will decipher technicalities in bills or contracts heavy with financial and legal jargon, as well as make sense of your finances. Look for someone who can give you clarity, not add to any confusion or uncertainty you’re experiencing.

Also, you want advice tailored to your individual circumstances. Banks, mortgage lenders, and other big corporations are often able only to advise you in a general way. So be on the look-out for ‘cookie cutter’ advice that doesn’t suit you personally.

Make sure your adviser is solutions-oriented and able to devise a number of different alternatives to any funding challenges you’re facing.

5. What types of small business funding are there?

There are, according to Smart Company, several ways to fund a new venture in Australia.

  • Venture capital is funds made up of high-net-worth individuals, giant super funds, corporates and other groups. They’re looking for start-ups with high growth potential, as well as founders with whom they can have a good working relationship, as well as businesses to which they can add value.
  • An ‘angel investment’ is someone who provides capital for start-ups, often in exchange for convertible debt or ownership equity. Many new businesses turn to these kinds of investors for their initial funding. As these well-funded, private investors are often willing to take risks on nascent entrepreneurs, their investments can be small - including operating costs and income for the initial few years. They also provide bonus value through sharing their numerous business contacts and established expertise.
  • ‘Accelerator funding’ often focuses on supporting technology-based or digital start-ups. Accelerators may be funded by venture capital investors, public bodies or large corporates depending on their structure and objectives.
  • Debt funding allows start-ups to take on debt to fund their company, rather than giving away equity in exchange for capital. A start-up could consider using this type of finance to sustain their business in between investment rounds. Although it represents a quarter of all late-stage funding in the US, Europe and Israel, it has been relatively hard to come by in Australia.
  • Crowdfunding is when money is raised by several individuals who have chosen to fund a project or business, and ‘donators’ become investors. By funding a company in this way, the 'crowd' gains part ownership of the business and have the potential to make a return.
  • ‘Equity crowdfunding’ is structured in a similar vein. Just like more ‘standard’ crowdfunding (for art projects, holidays and local fundraising, or through businesses as mentioned above), money is raised by a group of people who have chosen to fund a project or startup. With equity crowdfunding, donators become investors and expect some kind of return.
  • ‘Friends and family funding’ has also been gaining momentum as an option for funding sources in recent times – where people you know have enough confidence in you, to invest in you, as opposed to just your business. 
  • Small business loans seem like an obvious choice as a traditional means of securing finance for small businesses. However, the high-risk nature of many start-ups makes this an often difficult source of funding to secure.
  • Corporate ventures will be more inclined to base their investment on the idea or business (rather than in you, specifically). These are venture capital funds backed by the likes of a bank or insurance company. NAB’s venture funding got as high as $100 million in 2018.
  • ‘Bootstrapping’ is where SMEs consider using the founder’s own cash and sustaining it through its revenues. There are pluses and minuses with this approach, in that when bootstrapping, you stand to gain a lot more if your company is a success. But you also stand to lose a lot more if things don’t go well. Your business will often require some monetary investments, and in that case, they’ll have to be taken care of by you.
  • ICO, or an initial coin offering, is a way to sell cryptocurrency to raise capital for blockchain-related projects. By selling crypto tokens in exchange for Bitcoin, Ether, other cryptocurrencies, it resembles Initial Public Offerings (IPO), except that ICOs are mostly unregulated. Many such coins have had the value fall from underneath them in recent times.

Can I apply for government grant financing?

You can also seek out one of the many available government grants, which typically take one of two forms: either upfront grants requiring applications while competing against other applicants or tax incentives that are available if you meet a specific criterion.

Some key examples of government grants include:

  • RESTART: A wage subsidy program to encourage employers to help hire and retain employees over 50 years of age.
  • CSIRO Kick-Start: An incentive offering up to $50,000 for local start-ups in the research and testing phase of their new product or service when they partner with the CSIRO.
  • Research & development (R&D) tax incentive: A tax offset against R&D expenditure for companies; aiming to encourage innovation.
  • Australian Government Entrepreneurs’ Programme: Encouraging new ideas through competition and production, helping businesses grow and compete in new markets.
  • New Enterprise Incentive Scheme (NEIS): Encouraging self-employment and providing training in a small business qualification and a mentorship program for job seekers with eligible business ideas to set up and run their business.
  • Certain Inputs to Manufacture (CIM) Program: Permitting manufacturers to import raw materials and goods without paying import duties.

6. What are the best ways to attract potential investors?

If you’re seeking investor funding as an option, you need to make sure that whoever it is you’re pitching to is the right fit and is likely to invest based on their previous investment decisions.

To make the most of your time and energy (as well as theirs), you’ll want to focus on potential investors who have a track record of having backed businesses like yours. You’ll also need to ensure you’re on the same page as them, as you don’t want to go into business with someone whose values don’t align with yours.

That’s if you have the option of choice. Getting your foot in the door is often a substantial challenge on its own.

Forbes noted seven potential ways to secure investors, which ranged from applying to start-up accelerator programs to using social media and blogging to raise your online profile. Whereas Startup Pro’s Martin Zwilling says “[t]he challenge is to convince investors that your business will attract real customers before you have a revenue stream that exceeds your expenses.”

He feels that since there is no magic indicator in business, all that matters at the end of the day are results. Zwilling concluded that the more evidence you can provide of present or potential customers, the more likely and timely it is that you will be able to obtain the investment you need.

So, research, and ‘best guess’ financial modeling are key.

“Your passion and personal conviction are necessary, but not sufficient, to turn a great idea into a scalable business,” he wrote.

Lachlan Grant

CEO at

Vital Addition provides accounting, financial, and tax advice and expertise that is fresh, honest, and reliable. As founding partner and CEO, I believe in empowering SMEs to make business decisions with confidence, and face the challenges associated with growth with informed optimism.