How Do I Finance My Small Business?

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Table of Contents

• What is a Small Business?
• Financing From Banks
• Equity Finance
• Small Business Grants
• Māori Small Business Owners
• Pros and Cons
• Key Takeaways
• Frequently Asked Questions

If you have an entrepreneurial idea or a desire to be your own boss, you might consider starting a small business. However, setting up and running your own small business can be costly. Furthermore, finding sources of financing can be confusing. Therefore, this article will outline the different avenues of financing for small businesses and some pros and cons of each source.

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What is a Small Business?

A small business is a business with fewer than 20 employees. Unlike start-ups, they usually do not have an entrepreneurial idea or new invention they wish to market. Instead, they provide goods and services in a pre-existing market. Small businesses are vital to the New Zealand economy, especially for smaller regional and rural communities. 

Financing From Banks

Banks tend to be the primary source of funding for small businesses. Usually, this will come in the form of small business loans or credit cards. Alternatively, some banks will offer ‘start-up loans’. Although, realistically, you can use any loan to fund your new business by borrowing money from the bank and then paying it back with interest over time. However, you will often need to provide some home or business property as insurance. Despite this, you will still retain total control over your business and assets.

It would be helpful to note that bank loans can be challenging to get. Often, banks view small businesses as risky, as they typically cannot provide any evidence that the business will be sure to succeed. However, there are some things you can do to improve your chances of getting a loan, such as:

• establishing how much money you will need to set up your business;
• writing a strong business plan and ongoing budget;
• acknowledging what risks your business is facing and how you plan to overcome them; and
• getting a plan together for how you can repay your loan.

Equity Finance

Alternatively, you can use your own money, or someone else’s, to finance your business. This is known as equity finance. This person is usually a friend or family member but can also be business-savvy strangers (‘angel investors’). Furthermore, you can also raise money through crowdfunding. Often, you will not have to pay this money back with interest like you would for a bank loan. However, the people who give you money will then become investors. This means they will own part of your business and receive a share of the profits. Thus, you will be giving up some control of your business.

Small Business Grants

A small business grant provides the business money you do not have to pay back. This money generally comes from: 

• philanthropists; 
• larger companies; and 
• the government. 

Businesses that help create jobs or support a community will typically receive a grant. Typically, the party providing the small business grant will focus on specific: 

• regions;
• sectors; or 
• causes that could benefit from a helping hand. 

Māori Small Business Owners

Te Puni Kōkiri, or the Ministry of Māori Development, can help Māori small business owners with advice, information and financing.  

Pros and Cons

Key Takeaways

Starting a small business is a fantastic way to work for yourself and grow something you are passionate about while also boosting your community. However, financing small businesses can be a tricky process at times. The main ways small businesses can receive funding are through:

• bank loans; 
• equity financing; and 
• small business grants.

Make sure you consider the pros and cons of each avenue and choose avenues that work the best for you and your business. 

If you need legal assistance financing your small business, our business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions