One of the biggest challenges for all businesses in the current financial environment – and design and fashion businesses in particular – is raising finance.
Whether it is to get a new business off the ground, or to help achieve growth plans or acquisitions, banks are still extremely cautious about lending money.
Businesses in the fashion industry are likely to find it even harder than those operating in other sectors, for a number of reasons.
For example, their business model can be difficult for banks to quantify, especially if the business is built around one person’s individual talent and vision.
Start-up businesses can also struggle to define how they are going to break into the established market – is ‘bricks and mortar’ or online the best way to go? Should they approach retailers such as Myer or David Jones to get started? As the retail market in Australia becomes increasingly global and online, getting the answers to these questions right is very important.
For businesses seeking to raise capital, or to achieve growth, and are looking for options other than bank funding, what are the alternatives available?
Private investors
One approach that is becoming increasingly attractive is private funding. This doesn’t mean private equity, but rather getting funding from a group of high net worth individuals who are seeking alternative investment options to the more traditional areas such as the sharemarket
or property.
This isn’t an easy option, as it can be very time-consuming, and finding the right investors can be difficult. However, if these challenges can be overcome, it can be a stable and long-term source of capital for a small business. In some cases, there can also be valuable access to business people who can assist in other areas of managing and growing the business.
Collaborative investing
At the other end of the scale, some businesses have recently found success by attracting multiple small members, usually by offering some kind of special promotion through social media. For example, a fashion designer could promise their Twitter followers early access to new season designs, or one-off designs, in return for funding.
The main drawback of this approach is the legal requirements in relation to the public offer of shares and securities, which is highly regulated. Some innovative companies such as Naked Wines have circumvented these regulations by offering incentives to “members” who pay a monthly fee that can be used to make purchases.
Strategic alliances
Another option to help achieve growth is through strategic alliances. This is a concept that was in vogue in the 1960s, and we are starting to see it make a come-back. For example, a designer could enter into an alliance with a boutique store for distribution purposes, perhaps providing a unique range as part of the arrangement.
A carefully planned alliance will reduce risk and can provide access to the partner’s capital. The expression ‘virtual funding’ has been used for such arrangements as they bring all of the benefits of a cash injection without having to sell shares or borrow money. If capital is restricting business growth, then strategic alliances should be explored further.
Seed capital
The importance of sourcing seed capital has increased in recent years as other options have become increasingly difficult. Traditionally, seed capital has been seen as the ‘starting point’ of the capital raising process, with the intention of exploring other options further down the track.
Recently, companies have been trying to source greater amounts of seed capital from friendly investors to counter delays in other options, and the backing of solid seed investors has become more critical in recent times.
Banks
If the more traditional approach of a bank loan is still considered the best one for the business, there are a few ways to make it more likely that the bank will agree to provide finance.
While all investors will require some form of documentation or proposal before making a final decision to provide funds, banks have very specific processes that they need to complete before a loan can be approved. It’s worthwhile spending some time finding out what this process is, and taking every possible step to bring together the kind of information the bank needs, in the format it needs it, before even starting the application process.
Ensure that the business is shown to be as professional as possible. Keep all personal and business records and financing completely separate – for instance, have a credit card that is purely for business use, and maintain good records showing payroll and superannuation details. A business that seems haphazard and disorganised is much less likely to inspire confidence in the bank than one that is professional, ordered and well-managed. Sometimes, being creative might be a drawback!
Finally, take advantage of any expert advice available. Talk to the accountant or any family or friends who have business management experience. They can provide a third-party perspective of the application that can be invaluable.