The Pros and Cons of bringing in an investor for your business

Starting up a business often involves large costs initially which can be difficult to manage alone. Add to this location, staff, budgeting and planning and starting a business could become an emotional rollercoaster. For this reason many Australians consider the use of investors to help with the financial risks on the business set-up. Rather than trying to manage the business alone, investors can take a significant load off the financial risks taken in the initial start-up phase.

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By having an investor, it is easier to overcome any financial obstacles, particularly where loans may not be approved by banks. Without an investor, some businesses are often left on their own to handle the finances as well as juggle every other aspect of the business. Specialising in small business accounting, MAS Accountants has had over 50 years expertise and experience dealing with small businesses in their beginning stages.

John Corias, Senior Partner at MAS Accountants, has provided the pros and cons of having an investor for your business:

Pros

  • One of the primary reasons small business fail is often due to a lack of cash flow. Having an investor can overcome this, or the inability to anticipate sufficient funds in the initial start-up phase by providing financial assistance that is not necessarily classified as a ‘loan’.
  • “Silent” investors who invest money but remain separate to daily management are a good way to fund your business without losing control over the primary business operations.
  • Where banks may be reluctant to lend loans based on potential, private investors are often more risk averse than traditional lenders.

Cons

  • Investors often have high expectations as to how and when they are repaid, as they now have partial ownership of the business.
  • Investors can hinder the decision making process as their primary focus may not be business success, but rather their own personal investment.
  • Documenting every possible eventuality with a solicitor can alleviate such issues, but can also become costly to the business in itself.
  • Having investors who are friends or family may put a strain on the relationship should the business take a turn for the worse.

As every start-up is different, when to introduce investors into your business can vary considerably, depending on its growth and progress. Whilst it is most common to have investors during the initial start-up phase to ease financial risks, investors can still be valuable once a business is well developed and stable. Introducing investors just before a new launch of a service or product is also beneficial as the business is at a high risk period of financial challenges. Timing investors for these events allows business owners/management to focus on delivering the best long-term outcomes without being hindered by short-term cash flow considerations.

“The key to convincing investors to come on board is a thorough, well researched business plan and the confidence to sell and implement it well,” says John.

For more information please visit www.masaccountants.com.au

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