Raising finance to buy a business

by 17th of May, 2017

If you are looking to buy a business there are a number of finance options available that should be considered. Most banks and lenders in Australia offer a variety of loans including secured and unsecured loans. These tend to require a minimum of 12 months trading of the business and good cashflow. As with most business sales, the securing of a loan can be time consuming but is necessary if you don't have finance available to buy the business. 

Getting a loan:

- secured small business loans.

There are many banks and financial institutions that offer small business loans. Though criteria is getting tighter. Most of the small business loans are secured against the assets of the business. So if you are buying a small business, you will need to know what equipment, assets or property (if freehold) that the business has of value. As you are buying the business, the banks may also assess your ability as an individual to successfully run the business (i.e. do you have hospitality experience if buying a café). In order for the bank to process a small business loan, they need to know about the business. Usually you cannot take out a small business loan without the businesses financials, a business plan, what security you can provide for the loan etc. It is common for buyers to use this path when buying a business. It has also been stressful for many sellers, who wait the weeks for the loan to come through, only to find the buyer ‘couldn’t get approval’ and they cant sell the business. So whilst this is one of the most popular methods, it does take time and you need to have a good understanding of the business your buying.

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- unsecured or line of credit

Recently, Australia instituted unsecured business loans. This allows business owners to borrow money from a lender that is not associated with any assets. According to Aussie Home Loans, this is usually a better option for businesses that have a high cash flow, usually from a service business rather then one with a high amount of equipment or assets. With an unsecured loan it is based on the cash flow of the business, and there usually needs to be 12 months worth of trading as a minimum, a good credit rating and consistent good cashflow. Obviously you will need the figures from the business you intend to buy, before you could apply for this type of loan.

Save Save Save:

Depending on the business you are looking to buy, you may be able to save the capital. If you’re a hair dresser wanting to run their own salon, this goal is achievable. There are beauty salons on the market for under $50,000. If you open an online saver account, such as the BankWest Hero saver which currently has 2.65% interest as long as you deposit $200 a month… You could look to save enough money within 2 years to buy your own salon. If your looking at construction business or something greater then $100,000+ then you may need to look at alternate financing options, though having a deposit will always work in your favor with the lenders.

Touched by an Angel:

An angel investor is usually a wealthy person who invests in a business during the initial stages. You have to have a coherent business plan, action plans, and a vision for the future. If your plan is foolproof, angels will flock to you. Angel investors usually have experience in the field you are looking to enter, and are a wealth of information and ideas.

If angels aren’t knocking on your door, remember that it takes a village to raise a child. It also takes a community to build a business. If your friends and family have the ability, it might not be a bad idea to ask for them to contribute anything they can. Friends might be a bit trickier. However, lenders and borrowers are hardly ever friends. Make sure that you pay them back as soon as you can in order to preserve the friendship or family ties.

Mortgaging Peter to Pay Paul:

This is the least palatable route to success. It may be possible to mortgage your house or existing property. With the money from the mortgage, you would be able to purchase the new business. This method will require a mountain of paperwork. If you are mortgaging your house in order to buy a business, the bank will probably want to see your plans for the business. This will ensure that you will be able to pay back the money, minimizing the risk to all involved.

Buying a business costs less in time and money than it does to start a business from scratch. Raising the money to successfully pull it off is a daunting process. However, with patience and vision, you could be buying your own business and no longer work for someone else.

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