How to buy a business if you're broke

• Nicky Tatley

Whilst once a venture reserved only for those with a lot of spare cash, buying a business is now an option for a much wider demographic.

Australia is gradually embracing a greater range of alternative finance options which means its vibrant small business market is open an increasing number of aspiring entrepreneurs.

Traditional bank loans are now being replaced by more flexible and manageable funding options so if you have the required business skills, becoming your own boss has never been easier.

Finance companies are growing in numbers but there are also a number of other routes to funding an acquisition and buyers can now lower the equity portion of a purchase to as low as 10-30%.

Here are 5 alternative finance solutions:

Peer-to-peer/crowdfunding

The revolution in alternative finance has come to Australia relatively late. The UK and US began to embrace peer-to-peer and crowdfunding platforms nearly a decade ago in order to fill the credit gap the banks created after the global economic crisis.

In 2012, however, Australia’s first peer-to-peer company – Society One – was founded and since then and since then several other lending platforms have cropped up including Ratesetter Australia, Direct Money and most recently Money Place which was launched in 2015.

Crowdfunding, whereby a prospective business owner can raise money for an enterprise by tapping into a huge pool of investors, has also taken off. ASSOB, OZCrowd, and VentureCrowd are market leaders.

A major benefit of this is that with such a large number of people invested, you have an immediate network for marketing and publicity.

If there are investors with key skills, such as accountants or lawyers, they may even be able to provide their professional services to the business at a discount, or free of charge.

While not usually becoming traditional shareholders or partners, it's advisable to offer investors some return value, such as discounts, incentives or exclusivity on new products.

Of course, with peer-to-peer and crowdfunding you will need a decent credit rating and proof of the viability of your proposed business, but these financing options are proving far more achievable than knocking on your bank manager’s door.

Equity financing

If you're comfortable in conceding some control and stock of your business, equity financing may be the answer.

Essentially, you are asking for help with finance in exchange for some shares or a percentage stake in your business.

On the downside you'll be losing some of the control in your business, but it can be a way to attract wealthy investors and partners. On the plus side, you won't need to pay back any loans or investment with cash.

Seller financing

Another method with its own pros and cons, seller financing is a process whereby the previous owner agrees to defer payment for a short period, typically 3-5 years.

This can be beneficial as the seller will wish to see the continued success or growth of the business to ensure quick payment, and may be open to negotiation during that period.

On the negative side, the purchase price may well be higher. As the seller is deferring their lump sum payment, they may ask for a larger sum overall - say 10-20% more.

Family ties

On a smaller scale, many business start-ups or takeovers are funded through family members.

Loans or investment often come with no fixed payment times, penalties or even interest. Of course, the potential pitfall should a business fail is that you may then have debts or conflicts with your family.

This approach needs to be carefully considered, especially if the personal risks are high.

Leasing companies

If your business has, or requires, specific or specialised equipment, one possible source of income is to sell that equipment to a company and then lease it back.

This provides an immediate cash injection, though of course you will be giving up some of your assets.

Many prospective business buyers will use a combination of the methods we have mentioned. Although this is essentially financing an acquisition with debt, it can be a very smart move if you are buying a relatively successful business and have borrowed a sensible amount in relation to financial projections.

Unlike acquiring a mortgage on a home, a business has the potential to generate positive cash-flow from day one, which can be put towards interest costs and amortization.

If you thought buying a business was out of your reach, take another look at your options – and then take a look at the thousands of businesses you could buy at here at BusinessesForSale.com.