When planning to finance a business purchase, it is important to understand the different ways you can acquire funding and also what type of finance is best suited for your business. While buying a company can be less risky especially if it’s already doing well, you’ll most likely part with a lot more to acquire it. Businesses can be financed either through debt or equity and should you choose to purchase a business through financing, this article will explain the options available to you.
Debt financing
At its simplest, debt financing is money lent to a company by an external financier. These include banks, credit companies, credit unions and building societies. Borrowings sourced from financial institutions attract interest and penalties apply if repayments are late.
Terms of the loan will vary depending on your source of financing. For example, loans from family or relatives will most likely attract less to no interest. But at the same time, they could affect your relationship with the individuals.
With debt financing, you don’t have to give up a stake in your business and the interest paid can be deducted against your taxes.
The loan needs to be repaid regardless of how well or not your business is doing. Some lenders will also impose high interest rates on borrowed amounts so care should be taken to only go with fairly rated facilities.
Vendor financing
Also known as owner or seller financing, vendor financing occurs when a business seller also lends cash as part of the buying price. The buyer basically accepts an IOU from the seller. This type of transaction is common where the amount that the buyer is willing to offer does not meet the seller’s price.
Vendor financing is crucial when the buyer is unable to meet the full cost of buying a business without having to break the bank or borrow additional funds. If you’re especially unable to access financing, this could be a great alternative for bridging the financial gap.
A vendor finance agreement is normally prepared to capture the nature of the transaction using details such as the amount being borrowed, the rate of interest, repayment period, security instrument, and more.
The biggest downside to this mode of financing is that not every seller will be willing to vendor-finance. The interest rates involved can also be unfairly set as they are determined by the seller.
Equity financing
Lastly, there is equity financing. As the name suggests, this mode of financing involves injecting money into a business in exchange for a stake in it. The loan doesn’t have to be repaid as the lender will be taking a part of your profits.
It is common for equity finances to be sourced from relatives, friends, or private investors.
The best thing about it is that the incoming stakeholder can be beneficial to your business, depending on their skill set, experience or industry connections. That means that when sourcing for equity finances, it’s probably wise to go for a strategic partner that will offer much more than just money.
As with the first two options, there are downsides to equity financing. One of them is ownership sharing obligation. This results in splitting your business profits as long as the lender’s money remains in your business. If you prefer total control of your business including decision-making, you may want to by pass the equity mode of financing.
Figure out what works for you
Your business financing decision today will impact your new business for years to come. Before settling on a financing option, make sure that you’re fully aware of all the products available to you and talk to a specialist for guidance.
ABBA Group prides itself in offering sound business financing advice to its clients as well as a range of lucrative business listings all over Australia. Reach out to one of our experienced brokers for a one-on-one chat today. Our team is dedicated to seeing you through your business ownership journey from start to end.
