10 ways to finance the purchase of a small business
Getting a loan can be challenging, but an applicant with a good business plan has no shortage of options. Here are 10 ways to get money to buy or start a business:
1. The bank. An obvious choice, most of Australia's big banks have funding available for capable new businesses. You're likely to find small business loans from banks require security, usually in the form of commercial or residential real estate.
2. Credit unions. These are not-for-profit financial institutions owned by their members, some of whom may be entrepreneurs looking for a good investment. If you're a member of a credit union then you might be able to get funding there.
3. Borrow against the business you buy. Did you know it's possible to get a loan by borrowing against the assets of the business you will buy with that loan? If you're buying a company with valuable assets in the form of property, vehicles, equipment or machinery then these can be refinanced or used as collateral for a secured loan. Similar options exist for borrowing against the projected revenue of the business you buy or outstanding invoices.
4. Vendor finance. This is a way of buying a business where the loan is built into the terms of sale and repaid with future profits. For example, someone might want to sell a business for $500,000 but you, the buyer, can only afford $200,000. A vendor finance agreement here might involve the seller building a $300,000 loan into the sale to be repaid in the form of 10% of business profits. The exact terms and conditions of these deals vary depending on what you negotiate with the seller.
5. Venture capitalists. These investors are groups or individuals that aggressively look for big returns on investment and have a particular interest in new startups. They typically offer money in exchange for equity or a share of the company ownership. When the company grows and succeeds this equity multiplies in value, making it a high risk, high return strategy for venture capitalists. To attract venture capitalists you should have a plan for enormous, potentially global, business growth.
6. Angel investors. A more specific type of venture capitalist, angel investors are usually individuals rather than groups. They too want to acquire equity, but usually take a more active role in the success of the company and offer money as well as advice, experience, clout, connections and other priceless intangibles.
7. Government grants. The majority of small business assistance from the government comes in the form of free or inexpensive advisory and guidance services, but there are also small business grants that offer funds to applying businesses that meet certain requirements. For example, you might need to be expanding your business in a certain way, conducting innovative research or breaking new technological ground. There are many different types of grants and each has different purposes and eligibility requirements.
8. Crowdfunding. Crowdfunding is when you go online to ask lots of people to each give a small amount of money. This can be a good litmus test of whether or not the general public is ready to believe in your business. Your success here is largely down to luck, but your odds improve by being skilled in marketing, being able to offer your supporters gifts and freebies and having a promising, well-thought-out business plan.
9. Family and friends. The terms, conditions and benefits you get from these loans depend on how much money your friends and family have and how much they're willing to invest in you. Many successful enterprises got their start with loans from family and friends, so this option shouldn't be disregarded. Remember to keep everything official and professional by keeping a written record of any deals made.
10. Your own savings. If you believe in your business plan then this is a good place to look first. Keep loans down by putting up as much of your own personal savings as you feel comfortable with. Some lenders, particularly angel investors and venture capitalists, will regard this highly and be more likely to invest in your business if you have this kind of personal stake in its success.
Use a business loan comparison calculator to compare different options side by side.