Small and medium-sized enterprises (SMEs) are increasingly exploring equity financing to meet their growth requirements. Unlike traditional debt financing, which imposes a burden of ongoing repayments, equity financing provides capital without the need for regular financial liabilities. This form of financing is particularly appealing to businesses that seek to scale, develop new products, or enter new markets.
As an accountant, business advisor, or virtual CFO, you are often the trusted professional that clients turn to when navigating the complex landscape of equity financing. These businesses, ranging from startups to companies with revenues up to $100 million, rely on your expertise to help them understand, secure, and manage equity funding. From private investments and government grants to venture capital and crowd-sourced funding, each financing option comes with unique requirements and opportunities.
This article will outline key equity financing options for SMEs, providing client profiles and service opportunities where you, as a trusted advisor, can add value.
Key Equity Financing Options
1. Private Investment
Client Profile: SMEs with high growth potential, often family-owned or entrepreneur-driven businesses looking to expand operations, develop new products, or enter new markets.
Business Size: Typically, this includes small businesses or larger family-owned (unlisted) companies seeking private funding for growth.
Potential Service Areas for Accountants and vCFOs:
- Assisting businesses in developing detailed financial forecasts and business plans.
- Advising on the structure of investment deals, including equity dilution considerations.
- Conducting due diligence on potential investors.
- Managing investor relations, including ongoing financial reporting and communications.
2. Government Grants
Client Profile: Businesses focused on research and development (R&D), innovation, or specific industries such as manufacturing and clean energy, that meet eligibility criteria for government support.
Popular Government Grants for SMEs Include:(a) Export Market Development Grant: Opens for new applications on Tuesday, 12 November 2024, available to entities with turnovers under $20 million and (b) Industry Growth Program (formerly Accelerating Commercialisation Grant): Offers grants ranging from $50,000 to $5 million. The highest approval in the latest round was $4.4 million.
Business Size: Generally, companies with turnovers of less than $20 million.
Potential Service Areas for Accountants and vCFOs:
- Identifying relevant government grants and assisting with the application process.
- Ensuring compliance with grant reporting requirements.
- Monitoring the use of grant funds and preparing grant acquittals.
- Advising on tax and financial reporting implications of receiving government grants.
- Undertaking work assignments that may be partially funded by the grant.
3. Capital Raising (Section 708 of the Corporations Act)
Client Profile: Companies seeking to raise capital through private offers. A private company can raise up to $2 million in 12 months but is limited to 20 investors.
Business Size: Typically, companies with turnovers under $25 million, although there is no strict turnover limit. Capital raising is often aimed at businesses with significant growth potential.
Potential Service Areas for Accountants and vCFOs:
- Advising on legal and regulatory compliance under Section 708.
- Preparing necessary financial documentation and investor disclosures.
- Structuring capital raises to optimize ownership retention and investor engagement.
- Ongoing monitoring of the capital raised and its impact on financial performance.
4. Early-Stage Innovation Funding
Client Profile: Startups or early-stage companies engaged in innovation, typically in R&D-driven activities, such as technology startups, that qualify for incentives under the Early Stage Innovation Company (ESIC) regime. Companies can raise up to $2 million in 12 months under Section 708.
Business Size: No revenue limit, but the focus is on startups and early-stage companies.
Potential Service Areas for Accountants and vCFOs:
- Determining if a company qualifies for ESIC status and advising on the due diligence process.
- Assisting in the creation of compelling financial models that highlight the company’s innovation.
- Advising on the potential tax incentives for investors and how they impact business funding.
- Monitoring compliance with ESIC requirements after the investment is secured.
5. Crowd-Sourced Funding (CSF)
Client Profile: Small businesses with strong community or product followings, aiming to raise capital through public equity offers via crowd-sourced funding platforms. Approved companies can raise up to $5 million in 12 months and repeat the process in subsequent years if approved by a CSF intermediary and supported by the market.
Business Size: Companies with turnovers up to AU$25 million.
Potential Service Areas for Accountants and vCFOs:
- Advising on the preparation of offer documents and financial disclosures required for CSF campaigns.
- Structuring the funding offer to align with the company’s growth goals and investor expectations.
- Assisting with the selection of intermediaries and ensuring compliance with CSF regulations.
- Managing investor communications and providing ongoing financial reporting.
6. Venture Capital
Client Profile: High-growth potential companies that have achieved product-market fit and are seeking significant capital investment to scale operations.
Business Size: Typically startups or early-stage companies with no strict revenue limit but with a focus on high-growth sectors.
Potential Service Areas for Accountants and vCFOs:
- Advising on venture capital deal structures, including equity, preferred shares, and governance implications.
- Conducting due diligence and preparing financial reports required by venture capitalists, including business plans, predictive accounting reports, budgets, cash flow forecasts, projected balance sheets, and funds statements.
- Monitoring the impact of venture capital funding on business performance and advising on the achievement of milestones.
- Assisting with exit strategies, including preparing for future investment rounds or acquisition opportunities.
Call to Action
Equity financing offers a tremendous opportunity for SMEs to secure the capital needed for growth, but it comes with unique complexities and challenges. As an accountant, business advisor, or virtual CFO, your role in guiding clients through this process is critical. By understanding the key equity financing options available and aligning them with your clients’ business objectives, you can help them make informed decisions that will fuel their success.
Now is the time to explore how these funding opportunities can benefit your clients.
Take the first step by visiting our comprehensive resources on equity financing and learn how to position yourself as an indispensable partner in their growth journey:
https://cpdforaccountants.com.au/product/equity-financing/
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