Planning Funding For Your Business
Issue 013
For SMEs there are a number of ways that capital can be raised to fund business operations.
- Non-Companies:
Sole Traders and Partnerships can raise funding by applying for loans from banks, other financial institutions and individuals who are prepared to lend money. Normally the lender will require security for the loan. Security is normally real estate over which the lender is able to take a mortgage. Loans normally include a requirement for personal guarantees and for monthly repayments of principal and interest.
The problem that some business operators have, is the ability to produce a suitable asset that can be mortgaged.
If the business is offering credit terms to its customers there is potential for the business to be able to raise “debtors factoring” based on the security of the business’s debtors ledger which would be offered as security normally accompanied by personal guarantees from the business operators.
- Private Companies:
Directors of Propriety Limited companies have a number of avenues available to them to secure funding for their businesses.
The directors could elect to borrow funds from a bank or other financial institution, in which case they will normally need to produce real estate assets as security, then the directors and shareholders will normally be required to sign personal guarantees in favour of the lender and the company will need to make monthly repayments of principal and interest.
Company directors also have the opportunity to borrow funds on the company’s debtors’ ledger, unless the bank already has a floating charge over debtors. Directors need to have a clear understanding of the security that has already been granted to a bank or other lender, before spending resources on planning to raise funds in a particular manner.
Companies have a number of opportunities to raise share capital to assist with the funding of their business operations.
These capital raising opportunities are:
- Raising capital utilising Section 708 of the Corporations Act.
- Raising capital utilising Early Stage Innovation Company Status.
- Raising capital utilising Crowd Sourced Funding Equity Raising Status.
The requirements on each of these capital raising opportunities are:
- Section 708 of the Corporations Act.
A private company can raise up to $2,000,000, in a 12 month period, from a maximum of 20 investors without having to issue a Prospectus.
You cannot advertise to raise capital in this manner.
Private companies have a ceiling on the maximum number of shareholders, which is 50, therefore directors need to be aware of this in planning capital raising.
Whilst there is no legal requirement for the documentation that has to be produced for potential investors, it is prudent for the directors to ensure that the following documentation is available:
- A Business Plan which sets out the director’s vision for the business covering the next 3 years.
- Predictive Accounting Reports relating to Budgets, Cashflow Forecasts and Projected Balance Sheets for the next 3 years.
- Corporate Chart summarising the directors, leadership team and other team members.
This process can be very quick. The only report that is required to be submitted to Australian Securities & Investments Commission is a return of allotment of shares which has to be lodged within 28 days of the capital raising being concluded and share certificates need to be issued to the new shareholders.
- Early Stage Innovation Company Status
This company category was created by the government amending the Income Tax Act to facilitate special income tax benefits being created that legitimate investors in a company that meets the Early Stage Innovation Company Status can utilise.
These special taxation benefits are:
- A 20% tax offset based on the amount of the investor’s investment in a qualifying company up to a maximum of $200,000 for a sophisticated investor and $10,000 for a retail investor; and
- If the shares are held for longer than 12 months and less than 10 years, there is no Capital Gains Tax payable when the shares are sold.
- If the shares are held for longer than 10 years the company is revalued after 10 years and a new “cost price” is determined for the shares which had qualified for the Capital Gains Tax relief.
A company, eligible for this classification, needs to be under 3 years of age, although in some cases, it could be aged up to 6 years, with a turnover of under $200,000 in the last 12 months and expenditure under $1,000,000 in the last 12 months.
There are two additional tests and the company must pass one of them – these are known as the:
- Principles Test – the company must be able to supply information to answer 5 questions relative to the directors’ expectations as to how the company will be able to trade in a market larger than the company’s home base.
- Gateway test – the company needs to accumulate 100 points from 8 questions relative to activities that the company has already undertaken in relation to research and development, admission to the Accelerating Commercialisation Grant program, having already raised in excess of $50,000 from arms’ length investors, the company holds a patent and a couple of other items.
- Crowd Sourced Funding Equity Raising
The Corporations Act has been amended to facilitate private companies and unlisted public companies being able to raise up to $5,000,000 in a 12 month period from the public, subject to the company complying with the special rules that have been introduced.
Eligible companies must have group international turnover of less than $25,000,000 and the value of the group’s gross assets must be less than $25,000,000.
The company can be any age and be involved in any type of business.
The government has created a special advisory service known as a Crowd Sourced Funding Intermediary. The Australian Securities & Investments Commission has licensed 16 of these Intermediaries who act as “representatives for Australian Securities & Investments Commission” to ensure that the documentation has been appropriately completed and then are able to act as brokers to assist in the capital raising process.
Companies have to produce a Crowd Sourced Funding Offer Document which has to be reviewed by the Crowd Source Funding Intermediary.
In each of these capital raising opportunities, companies will need to produce, as a bare minimum:
- Business or Strategic Plan analysing the company’s expected performance over the next 3 years.
- Predictive Accounting Reports relating to – Budgets, Cashway Forecasts and Projected Balance Sheets for the next 3 years.
- Full details of the company’s directors and leadership team members.
- Corporate Chart.
Towers Business Development has considerable experience in the capital raising process and in corporate governance generally. Peter Towers, the company’s Managing Director, was the Company Secretary/Chief financial Officer of a listed public company and has worked with many companies to assist them with their corporate governance and capital raising aspirations.
Recent Webinars/Posts
- Regular Business Review Meetings Help – click here to review the recording.
Upcoming Webinars
- “Planning Funding for Your Business” - Thursday 26th August 2021 at 12-noon To register - click here.
Towers Business Development Services
Towers Business Development does not give taxation advice but offers consulting services for small/medium sized enterprises and accountancy businesses, including:
- Corporate Governance Mentoring
- Mentoring/Training Company Directors
- Assistance with Due Diligence for Early Stage Innovation Company Status
- Assistance with Company Being Accredited as a Crowd Source Funding Equity Raising Company
- Assistance with Capital Raising Utilising Section 708 of the Corporations Act
- Assistance with the Preparation of an Application for an Accelerating Commercialisation Grant
- Government Grant Advice for SMEs
- Preparation of Business Plans
- Predictive Accounting – Budgets, Cashflow Forecast, Projected Balance Sheets
- Virtual Chief Financial Officer Services
- Succession Planning
- Establishment of Research and Development Systems
- Business Review Meetings – Monthly or Quarterly
Want to know more about the services that Towers Business Development can supply to assist your business in its business growth? You are invited to visit the Towers Business Development website; or contact Peter Towers:
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