The 2016-17 financial year is shaping up to be another challenging one for Australian small businesses, but a bright spot on the horizon is the government initiatives that allow small businesses to expand their sources of funding, said Tony Kabrovski, partner with HLB Mann Judd.
“The introduction of legislation to allow crowd sourced equity funding (CSEF) for entrepreneurs to raise funds online of up to $5 million a year, will change the face of business financing as entrepreneurs to bypass traditional lenders – with their restrictive lending criteria – in favour of crowd sourcing options,” Mr Kabrovski said.
“CSEF is a new fundraising approach that allows entrepreneurs to raise funds online—up to $5 million per year—from a large number of individuals in return for equity in their company.
“It is available to Australian public companies with a turnover and gross assets of less than $5 million. Until recently Australia’s regulatory requirements made it difficult for the widespread use of crowd funding to flourish, but this is now set to change.”
Crowd-sourced equity funding schemes are common overseas – most notably in the UK and New Zealand, and have been successful. In New Zealand, for instance, in the first 12 months of its operation, its CSEF scheme saw over 20 innovative companies raise more than $12 million in funds.
“Although it is necessary to become a public company to access SCEF, those companies that do so will now receive a five year exemption from the normal reporting and disclosure requirements that apply to public companies.
“Individuals seeking to invest using the CSEF platform can contribute up to $10,000 per company, per year, in return for equity in the company.”
Mr Kabrovski provided an example of how this scheme will work in practice.
“Imagine a pet tracking device which will enable pet-owners to track their lost companion using their mobile phone. The simple collar-tracking device works really well in the field but needs significant refinement to improve its saleability. This is estimated to cost $400,000.
“In this situation family and friends might provide $50,000 in funding. After approaching various banks, and being unable to obtain finance through traditional channels, the balance of $350,000 is then raised using CSEF.
“Although CSEF requires the private company to be converted to a public company, the company is able to take advantage of the five year exemptions on holding Annual General Meetings and producing audited financial statements, allowing it to focus on developing the refinements the device needs to be saleable.
“Without CSEF – innovative entrepreneurs such as this would most likely have struggled to bring their products to market.”
However, Mr Kabrovski warned small businesses against undertaking any sort of fund raising initiatives without the assistance of a professional adviser.
“Obtaining the funding is just the first step in the process. Ensuring you have the expertise to put the money to the best use is the next. This involves reviewing the structure of your business and reviewing the necessary staffing considerations to ensure the best chance of success.”
Mr Kabrovski was speaking at a recent HLB Mann Judd small business seminar on “Innovation, relevance and embracing change”. The seminar is part of a series for small business owners. A second seminar will be held in April.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.