Insights


Rob Kirkpatrick

Director

Things are now tighter in the local credit market than they appeared to be a few months ago.

Previously I had suggested that things seemed to be easing in capital markets and that access to funding had improved. It certainly looked that way in the early part of the year when a renewed confidence appeared to be emerging in the business community.

But by early May the European debt crisis reached a peak as Greece agreed to an EU and IMF bailout and there were rising concerns of a contagion spreading across all of Europe.

Gold reached new highs and international stock markets fell dramatically. Since then we have seen a significant ongoing deterioration in investor confidence worldwide, and consequently, available capital. Since Australia sources a good deal of its borrowings from overseas, the general gloom in offshore economies very much translates into shortages of funding available locally.

For companies wishing to pursue commercial opportunities in this market, or looking to reduce their reliance on traditional forms of finance, raising equity must now be considered as a serious alternative to raising debt.

Many larger corporations have successfully undertaken these steps over the past few years, as witnessed by the ASX reporting a record year for capital raisings in 2009 ($90 billion), despite a soft investing climate. Financial year 2010 is less impressive but there is still a lot going on, with the ASX placing total equity raisings at around $65.1 billion. However smaller SMEs and private companies have not gone back to their shareholders or to the wider market in order to retire debt.

In times such as these it is most important that companies wanting to survive and grow should be considering sourcing capital from places other than banks and lending institutions.

Types of capital raising

The term Capital Raising is generally used to describe fairly sophisticated methods of raising fresh capital for a new or existing business. This process is usually carried out by professional advisors and consultants who help the company seek investment money from potential investors.

There are many different options available to companies but in essence, businesses will seek funding either from sources that are close and well known to the company (internally) or from the wider public (externally).

The course of action you take will very much depend upon factors such as: size of the business, market sector, corporate structure, level of sophistication and depth of management experience and ability.

Whatever you decide, one thing is for certain: you will need thorough preparation for your proposal. A well documented and thought out strategy with supporting business modelling, forecasts and a clear vision, will open doors to potential investors. A badly pitched, last minute desperate grab for cash may scare off any potential investor or worse, you might find the investor picks up a large portion of your business cheaply and you lose control.

An obvious place to find capital is internally and in my next blog I’ll give some examples of what and who those internal sources might be and what form the investment might take. Often a big hurdle is for owners and directors is to overcome the embarrassment of approaching friends or family. But as already discussed, a well documented and presented plan can overcome that issue. Have a read of my colleague Steve Hogan’s recent Blog on “Capital Raising for Small Business – Choose your advisor carefully”.

Please feel free to tell me your thoughts, send me your comments or perhaps even some of your own experiences. If you have a particular question I will dig around and get you an answer.

 



Rob Kirkpatrick

Director

I help clients seek alternative funding options where mainstream lenders cannot assist.

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