When – and why – would a banker recommend equity funding?

‘No is a full sentence,’ HUBBED CEO and founder David McLean said to bankers at a recent Australian Business Growth Fund event. ‘And I’ve heard it from a number of you quite often!’

It’s an unfortunate truth that bankers often can’t approve their business customers’ requests for funding. It’s not a pleasant conversation to have.

Bankers know only too well that in some circumstances, additional debt is not the best option for a business, even one with great growth potential.

However, for many businesses and their bankers, there’s another solution on the table – one that enables bankers to look more holistically at their business customers’ growth needs.

In 2020, the six leading banks joined together with the federal government to create an alternative for businesses looking to upscale and grow – the Australian Business Growth Fund. It offers patient, minority-only equity funding for established and fast growing Australian businesses.

This means that for bankers, there’s a new tool in the toolbox – and ‘no’ doesn’t have to be the end of the conversation when a customer is seeking funding over and above what the bank can provide.

When is equity a good alternative? 

While there’s no set formula, bankers know what they are looking for when deciding whether a business would qualify for a loan. A proven track record in a stable industry, resilient earnings, and fixed assets to borrow against would all appeal.  

However, there are often circumstances where a well performing business requires more funding, and debt may not be the answer. Every circumstance is different, but there are several scenarios that might resonate with bankers. Consider where a business: 

  • has a plan for growth in a new area or market 
  • has a new idea or opportunity that requires significant and rapid action to make an impact in the market and get ahead of future competitors 
  • is looking to make acquisitions; or 
  • is generating insufficient cash flow to service the level of debt required to properly execute on their growth strategy.

There are also situations where a founder is looking to monetise their position in the business.  

In these cases, equity funding might be a good complementary solution to debt for bankers to explore with a business.  

Growth capital: a ‘non-threatening equity play’ for high growth customers
Bankers might find it unusual to start a conversation about equity funding. But there are three unique features about ABGF’s approach that enables it to complement a bank’s offering to businesses – which is a reason why the banks helped to establish the Fund in the first place. 

  1. ABGF takes a non-controlling equity stake in businesses (less than 50%), which means businesses retain control. The initial capital injection ranges from $5 million to $15 million, with the ability to provide follow-on capital.  
  1. ABGF offers patient capital, with the ability to hold an investment position for up to 10 years with no hard exit deadlines. This gives businesses time and space to grow without intense pressure to exit quickly.  
  1. ABGF also provides advice, experience and connections. It can help businesses unlock their next stage of growth, while also providing access to its talent network to support the founders’ strategy and improve corporate governance.  

A happy marriage between debt and equity

As bankers know well, for their business customers, debt and equity don’t work in isolation. The strongest businesses use both to meet their different needs. A viable equity option gives bankers the opportunity to look at their customers’ businesses strategically in assessing what kind of funding they need to grow. 

In FY23, 27% of ABGF’s business referrals came from the big four banks, and bankers have reported a very happy partnership. ABGF’s investee companies often grow quickly, have stronger balance sheets and end up needing and qualifying for more debt funding from their banks as they scale up and take advantage of additional market opportunities. 

With everyone – bankers, customers and ABGF – all pursuing the same goal of business growth, it’s a very happy marriage. 

Like with marriage, though, it all comes down to the quality of the relationships.  

It can be hard for a business to ask for money. From a banker’s perspective, being able to offer a solution outside of debt funding – and saying ’no’ to their customers a little less – helps their relationships thrive.  

Who should I refer to ABGF?

Ideal businesses are profitable with significant growth potential and a unique value proposition.  They must be Australian headquartered and generate between $2-$100 million of annual revenue. 

Learn more about ABGF’s investment mandate here and contact the ABGF representative from your bank if you have any questions.

Can ABGF assist your business?

The Australian Business Growth Fund (ABGF) is an active provider of patient, minority growth capital for Australian businesses with over $2 million in revenue and a proven business model.

It only takes a conversation to understand if your business is ready for growth capital with ABGF.