Acquiring finance in today’s market

Interest rates are at an all-time low, but Australian manufacturers are still struggling to raise finance. Alan Johnson outlines some options. 

You are running a successful manufacturing company that’s going OK, but you know, you just know it could be doing so much better if you could expand into larger premises and/or introduce a new product line or diversify into a new market.

All you need is a ‘lazy’ couple of million and you would see the company fly. But where do you get that sort of money from?

Talking to finance experts, it is clear there are any number of options, the key to them all, whether its $10k or $100m, is having a good story to tell investors, including a strong business plan, growth prospects, a valuation which can withstand scrutiny, and passion.

Finance options

According to finance professionals, manufacturers have a number of finance options and include:

Family and Friends: Your family and friends could be approached to chip in, but even if they do have the financial resources, it usually won’t be long before you exhaust your options here.

This option is OK for start-ups, and often the only option, but if you have been in business a few years, you would have exhausted this option already.

Employees: You could invite your employees to participate in your business success and growth through an employee share ownership plan which would provide you with some capital to fund expansion, and release your equity.

The key to this option is only inviting long-term reliable employees that you can trust.

Government Grants: Fed­eral or State Gov­ernment funding might be available to assist in the growth of your business, particularly for innovative and environmental projects, but they are often difficult to access and can be laden with restrictions.  

However, there a number of generous grants for manufacturers diversifying out of the automotive sector, especially for South Australia-based companies. For more information go to www.business.gov.au.

Listing: The stock exchange is the most expensive and time consuming way to raise capital for your company and is usually out of reach for the typical SME.

However there’s a relatively new capital raising technique that companies can use called ASSOB (Australian Small Scale Offering Board).

The ‘Claytons’ listing provides SMEs a mechan­ism for facilitating liquidity and capital raising that was previously only within reach for very large companies, but it can be a very slow process.

Debt: This is the most expensive option and will often involve mortgaging the family home, which is a risky move.

The problem with debt is that banks will usually only lend to people who don’t really need the money.

Even with the actual cash rate at historic lows, the rate for a SME is ridiculously high, and if you haven’t got property security to put on the table, you’re effectively at credit card interest rates if you can actually get the loan.

Angel Investors:  Companies often tap into angel investment networks such as Anthill, Business Angels and the Australian Investment Network and find high net-worth individuals to invest, often offering seed funding. 

The ‘angels’ are often retired professionals and invest their business skills and capital into new and developing enterprises.

However, critics complain about it being difficult to get past the gatekeepers to actually get to the right person and then to be able to articulate your proposition in a way that gets it over the line. 

It can be very time consuming and costly way of doing it and unfortunately not much success around it.

Private Equity Funds: Fundraising from private equity investors can be a good option for SMEs.

Some funds are doing well, but as fund sizes get bigger, the investment decisions get bigger too.

The problem is private equity can afford to be very, very choosy so if you’ve not got a very smart business plan, an excellent management team on board, and a growth story that you can articulate, then you’re just wasting your time, because the guys are seeing all the deals coming through and can cherry-pick.

The advantage of private equity though, if you can get the right deal size and the right team behind you, is that it’s not just cash, unlike an IPO where it’s mums and dads and institutions, you’re getting an advisory board and network of people who can add value to the business.
Merge with Competitor: Your first reaction is probably ‘no way’, but think about it. Mergers or partnerships can be a good idea.

They don’t require any finance and can be a cash-free way of plugging a hole in the business. 

Whether you’re looking to enter a new market, develop new products or bring in some know-how, look to see if there’s another business out there that’s already got that. If so, why not join forces either formally or informally?

While mergers are more popular at the moment, they’re harder to do, and take more investment time.

However, the chances are the people you’re merging with are sharing some of the same pain and if you get together maybe one plus one can equal three.

Crowdfunding: For some small companies that need capital to develop a particular product, traditional crowdfunding where people back projects for either altruistic reasons or to acquire “rewards” are a good option. 

Listing a project on a site like Kickstarter or Pozible can work as a pre-order channel and lets the entrepreneur test the market before committing capital. The concept has been around a few years and there have been some great business success stories, making it an increasingly popular option.

However, the biggest problem with any fundraising is managing a diverse shareholder base.

You might get to the point where you have a million mums and dads owning a share each and you have to go to a shareholder vote every time you want to do anything. It would be a huge drag on the company.

Investors: Attracting investors or venture capitalists (sometimes described by some as ‘vulture’ capitalists) is another useful option but can be difficult to organise and place you under a lot of pressure to perform in a very short space of time. 

Most will not consider investing in your company unless you can tick all boxes on a detailed list of criteria, including a clearly defined and formalised exit strategy.

Organic growth: Last but certainly not least, it is possible to achieve your goals the old-fashioned way, by growing revenue from customers and conserving cash within your business. 

Many successful companies have got where they are today by saving their own cash, retaining their profits within the business, and keep reinvesting in the business itself.

The upside is that it’s less risky, you don’t dilute your equity or take on costly interest repayments, and you can be confident you’re building your business on solid foundations rather than quicksand. 

The downside is that it is slower and your competitors may grab market share and entrench their position.

Whichever option(s) you choose, remember to have a great story to attract any potential investors before you pick up the phone.

Alan Johnson is Manufacturers’ Monthly’s former editor. He has researched and written about all aspects of the Australian manufacturing sector for over 25 years.