Whether you’re buying an established business or starting your own, you’ll need some capital to get you going. There are a number of different options to choose from, each with their own advantages and disadvantages. You also need to consider what impact the type of finance you choose will have on your tax obligations and cash flow so getting advice from an expert is recommended.
Many people like to invest their own money when they are starting or buying a business. They may have received a large windfall from an inheritance or redundancy payout. This may be considered a fairly low risk option as you don’t have any debt to repay. However, with the initial set up costs and ongoing expenses, it may result in a drain on your funds, especially as most new businesses take some time before they are returning a decent profit.
Also known as ‘business angels’, private investors are generally wealthy individuals who are prepared to take calculated risks by investing in businesses in return for equity and a share of the profits. It’s recommended you use the services of a lawyer and accountant to draft a legal agreement to protect the interests of both parties.
These are professional investors who invest large sums of money into businesses in return for equity. They not only supply funds but also function as business partners, offering strategic and operational expertise. The Australian Private Equity and Venture Capital Association Limited (AVCAL) compiles a database of venture capital companies. More information can be found on their website.
Loan from financial institution
Banks, credit unions and other financial institutions may provide a loan to either purchase an existing business or establish a new one. Banks generally have quite stringent assessment criteria and documentation requirements as well as needing collateral that’s equivalent to the loan’s value. A professional finance broker will be able to assist you to get all the necessary paperwork together as well as help find the best possible deal. It’s important to consider the impact of the monthly repayment on your cashflow when assessing your options.
If you’re buying an existing business, you may be able to consider vendor finance. This is where the agreed purchase price forms a loan between vendor and purchaser with the loan to be repaid out of the profits of the business over a fixed term. This has benefits for both parties: the vendor may get a better price for the business while receiving a steady income plus interest for the duration of the loan, while the purchaser is able to buy the business without having to find significant capital and can pay off the loan out of the profits of the business.
You can borrow money from family and/or friends, though you should carefully consider the potential impact on your personal relationships should any conflicts arise. Relative newcomers, peer to peer (P2P) lenders match people with money to invest with people looking for a loan. As many P2P lenders have only been around for a short time, the relevant risks need to be carefully considered.
Starting your own business usually requires a large initial investment to get things up and running. A single source of finance may not be the best alternative and you may need to consider a combination of options to suit your requirements. Getting professional guidance as soon as possible will minimise your risk.