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If you have an entrepreneurial idea or a desire to be your 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. 

Around 97% of businesses in New Zealand are small businesses.

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:

  • establish how much money you will need to set up your business;
  • write a strong business plan and ongoing budget;
  • acknowledge what risks your business is facing and how you plan to overcome them;
  • get 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. 

These grants are fantastic to help finance the start-up of your business but will not be able to provide ongoing support.

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

Type of Financing ProsCons
Bank LoansYou will retain complete control of your business.You may have to provide some property as collateral. 

These are also challenging to get, as banks can see small businesses as risky.
Equity FinanceOften, you will not have to pay this money back. The people who lend you money will be investors in your business, so you will have to give up some control of your business.
Small Business GrantsYou don’t need to repay the grant.They are challenging to get and are often only available for business in specific sectors, regions or causes.

They will also not be able to provide ongoing support for your business.

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 1800 532 904 or visit our membership page.

Frequently Asked Questions

What are the main ways you can finance your small business?

Bank loans, equity finance and small business grants are the main ways small businesses receive funding.

Is there a way that I can receive financing without having to provide collateral or pay interest?

Equity finance involves receiving money from other people to help support your business, making them investors. You don’t have to pay interest or provide collateral, but usually, the financing is in exchange for a portion of control of your business. 

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