Changing the funding game

Growth capital is more important than ever. But while we’re seeing new and innovative forms of funding stepping up to meet this need, it’s clear small and medium-sized businesses must step up too.

By

About 20 per cent of small businesses still find it relatively difficult to access finance, according to Access to Small Business Finance, a September 2018 Reserve Bank of Australia report.

While that figure represents a significant improvement since the global financial crisis, there’s clearly room to improve – particularly if we want Australia to foster innovation in a rapidly evolving world. And, as is so often the case, it’s digitisation that’s key.

Alternative forms of funding can be very important. Certainly, the digital transformation is offering opportunities to access new and ever larger pools of capital through a more open, transparent marketplace for small and medium enterprises (SMEs).

However, it’s not simply a matter of supply. Fostering demand among SMEs is just as important and this, according to Andrew Loveridge, NAB Customer Executive, Emerging Sectors, Business and Private Banking, ultimately comes down to education and capability building.

A range of sources

For now, most SMEs rely on fairly standard means of funding to grow their business.

“It’s fair to say that the well trodden paths of debt and equity are the primary ways these firms can attract growth capital,” Loveridge says.

For many, bank loans are the norm – and readily accessible, provided the businesses have sustainable cash flows to meet repayments.

That’s not always the case for a lot of early-stage businesses though. It can also be problematic when an SME has already put all of its real estate up as collateral.

Private equity

Nevertheless, there are new options out there when it comes to funding growth today – not least in the area of private equity.

Angel investors, for instance, are becoming an important source of support for those starting out. These investors tend to be successful entrepreneurs who have done very well for themselves and want to invest their time and capital supporting other budding entrepreneurs.

Another option for more developed businesses is venture funding, typically the preserve of new or emerging businesses considered to have long-term growth potential.

That said, while venture funding is alive and well in Australia – and on the rise – it’s still in its infancy. For now, there are concentrations around the health or tech spaces, including agri-tech and regulatory compliance tech, rather than anything more general, Loveridge says. “I think with time and awareness it will grow but we are nowhere near the likes of Israel or America.”

New-look funding

Where it’s set to get really exciting relates to digitisation. “Digital will play a massive role in terms of how capital will flow from entity to entity,” Loveridge says.

Crowd-sourced funding is one example of the new-look marketplace. It enables scale-ups and small businesses to raise much-needed funds from a large group (which can be retail or other investors) via the internet, each investing typically small amounts of money.

Under new federal regulations introduced in late 2017, eligible businesses in Australia can now raise up to $5 million a year this way, as long as they have less than $25 million in assets and annual revenue.

Going for growth

Not all the exciting developments are technology based. In November 2018, for instance, the government supported the launch of the Australian Business Growth Fund underpinned by a number of banks, including NAB. The private-equity style fund will aim to take non-controlling stakes in promising SMEs.

“It’s slightly different to the normal provision of private equity – its intent is for the banks to seed the growth fund and then support businesses to access patient equity capital without them taking more than 40 per cent of the business,” Loveridge explains. “That means there’s suddenly a whole new layer of growth capital that might come into the Australian economy.”

The UK launched a similar fund in 2011 and has already invested about $2.7 billion in a range of sectors across the economy.

Fuelling SME knowledge

Importantly, the new Australian growth fund addresses what is a potent issue for many SMEs – losing control of their business. “Generally speaking, a lot of the private equity that comes into the marketplace means that the business owners have to give up control to someone else,” Loveridge says. “They’re also concerned that in five years’ time they’ll have to sell the business to get a financial return.”

There is another issue. Many SMEs simply don’t have the knowhow to pursue funding opportunities. “These firms might be good at selling widgets but have no understanding of the availability of different markets to source capital from. Plus, they might not be as experienced as the actual markets would like them to be. They might not have the required people, reporting and governance structures in place.”

The UK Growth Fund experience included mentoring and support for SMEs.

Relying on an ecosystem

The rise in start-up hubs is also helping here. These networks of workplaces provide emerging businesses with the opportunity to work in close proximity to incubators and angel investors.

“You see them working really well,” Loveridge says, pointing to the Sydney Startup Hub as one such example. It’s a government initiative, offering more than 17,000 square metres of working space across 11 floors, housing more than 2,500 residents – and is a first of its kind in Australia.

“It’s really starting to provide an opportunity to have closer work relationships so people actually understand what’s available out there,” Loveridge says.

“A lot of what we’re talking about is actually building the soft stuff. Capital is very important but building the capability will be equally important.”