One of the most important steps in the process of buying a business is making sure that you have the money accessible to actually make the purchase.
The most obvious and ideal option for financing the purchase of a business is to save. Tightening the belt and getting down to saving will mean that it’s your money being invested and you don’t owe anyone anything.
Of course this is the best-case scenario. Yet sometimes an opportunity arises to buy a business and you may not have the ability to produce enough money when it’s needed.
So, what are you options when it comes to financing the purchase of a business?
Debt financing is categorised by the fact that individuals borrow money from an external lender, such as a bank, building society or credit union and then they are required to pay back the borrowed amount, with interest, within a specified time frame.
These financing options could be:
- Business loans
- Lines of credit
- Overdraft facilities
- Invoice financing
- Equipment leases
- Asset financing
Loans like this are offered by a wide range of institutions, with different interest rates and differing time frames – both short-term and long-term loans are accessible.
The great thing about debt financing is that it is, at the end of the day, your money that you are spending. The debts all fall on you which means that you still have complete ownership over the business once you’ve purchased it, so you don’t have to share the profits with anyone else.
It is also worth looking into whether the interest and charges on your business loan are tax deductible – this is possible in many cases and a big incentive for many who are looking to get finance for their business.
Equity financing is different from your typical bank loan. It’s categorised by internal lenders investing money into your business, these internal lenders can be:
- Family and friends
- Business angels
- Venture capitalists
- Public float
The biggest difference between debt financing and equity financing is that these investors then become part owners in your business and get a share of the profit that your business makes.
Taking the equity financing route means that you don’t get yourself into debt that you can’t get out of, but it does mean that there is another person implicated in your business who you need to share the profits with, so it’s worth thinking about whether this is the right choice for you going forward.
Having an investor, especially one who has a background in business, can mean that you get a wealth of knowledge, experience and business contacts on your side as you begin your new business venture.
Unfortunately, it can be a double-edged sword, particularly if it is friends and family investing in your business, as the business can get in the way of personal relationships and cause rifts if or when disagreements arise.
There are plenty of specific kinds of financing to look further into, but the first step is to decide whether you want to take the debts of your business on yourself, or whether you want to bring an investor into the mix who can help you with your finances while they receive a piece of your profit.
Making this decision will help you to move forward and choose the best financing option for you and the business after it has been purchased.
If you are bringing an investor onboard through equity financing, it’s particularly important to remember to conduct due diligence during the purchasing process.
Remember that it’s not just your money involved now and that the consequences of poor business decisions will fall on your investor too.