A major cause of business failure is lack of ready cash to pay for supplies and operating expenses. A lack of cashflow can lead quickly to business failure, even though a business may have many customers and produce good products. Many people choose to risk being in debt for the sake of a quick profit while others do not appreciate the costs involved in setting up a business.
The most common way for businesses to raise money is by borrowing it (debt) or by the people running the business putting in their own money. Either way, the debt must be repaid, although sometimes the business owners may not see their own capital repaid. Private investors may be prepared to put money into the business (venture capital), but generally it is illegal to raise money from the public without complying with the provisions of the Corporations Act 2001 (Cth).
Crowdsourcing / Crowd funding is a newly emerging method of raising capital for a startup venture or idea, but there are risks for the business owner depending on how the money is treated and what subscribers are offered, and could be considered to be a managed investment scheme in certain circumstance. There are serious consequences for being involved in an unlicensed managed investment scheme, and professional advice should be sought before raising funds in this way. Further guidance from ASIC here. The Australian Tax Office has some useful and important information about crowd funding and tax implications on their website also.
In any event, it is a good idea to prepare a business plan with anticipated sales and likely expenses. From this the net profit can be worked out. A third party lender will always require a business plan, budgets and other information to gauge the likely success of the business, before agreeing to lend money.
The financial and emotional cost of a failed business, especially on a family, can be high and every effort should be made to become acquainted with the current state of the market.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.