Financing Your Business

Now that you have decided on what sort of business that you want, it is time for one of the most painful parts of buying into a business – yes, the financial side.

Money is the root of all evil is a phrase that’s been bandied around quite a bit, and with the economic climate still in a rather delicate position, buying a business is not as simple as it sounds.

The ideal scenario is that you already have sufficient funds at your disposal. For instance, you may have been made redundant from your old job and you may have received a hefty redundancy package – or at least one that’s enough to help you buy a business. The other alternative is that you have enough funds in the bank anyway. Whether you were working in a high-paid job and chose to form your own business; whether you received inheritance money; or whether, in a vast miracle, you won the lottery, you may have enough money to buy your chosen business outright.

The more likely scenario is that you will have to borrow money, and again, the economic climate means that banks or businesses aren’t quite as willing to pay out as before. That means that you have to put your case to them, and also make that case as convincing as possible.

The two alternatives are both vendor financing and bank loans. Vendor financing takes place when a person or persons selling their business are wiling to lend the buyer part of the money needed. If you do not have the right amount of money, it may be possible to ask the vendor if they are willing to take whatever money you can afford, and then pay the rest back in installments.

It’s a good idea in principle, but be aware of a few things. For one thing, the vendor may wish to charge you interest, and may also want to use whatever assets you have as security, for example your home or any other property that you may own. If for whatever reason you cannot pay back the outstanding sum or if the business goes bust, be aware that you may have to pay the forfeit with your property – so make sure that vendor financing is a suitable option and that you know the risks.

But then the same could be said of a bank loan, which normally involves a bigger sum of money to be borrowed. And the vendor will certainly be happy when the sale goes through, since it will take a shorter period of time.

If you do choose a loan, one element that may be on your side is that your chosen business may be well-known. It’s also possible that you may have decided to buy into a franchise. Banks regard franchising as a safer bet, since the majority of franchises actually work out, and also most franchises tend to be high profile names. But equally, buying your own business may impress the banks if there is proof that that business has a solid track record and a history of making good money.

One of the best methods to prove your case is of course, producing a business plan. Providing that potential candidates come up with a good, well worked out plan, the chances are that they’ll succeed in paying back the money.

The advantages of producing a good plan will allow you to have a clearer understanding of what is required (a benefit in itself), and will prove to the bank or the vendor that you have a clear vision in your head of where the business will be heading. The plan needs to demonstrate that you have a solid grasp of the business opportunity and its projected financial forecasts. Of course, a bank or vendor is only going to respond to the people that can actually pay the money back.

Unfortunately, it’s rare that banks lend you all of the money, and with escalating costs, you are going to need to stump up some of that money yourself – call it the equivalent of a mortgage deposit. You will also need to bear in mind that you need liquid capital to support yourself during the first few days of your business. So work out the costs, calculate a worst-case scenario, and that way, you won’t be unpleasantly surprised.

When looking for potential businesses though, don’t just settle on the cheapest option. While there are plenty of affordable businesses out there at good value prices, you still need to make sure that you are compatible with the business and that the business is compatible with you in terms of interests, knowledge and skill. Don’t just settle on the first cheap business that comes along – make sure it’s the one for you.

If you want to choose a bank loan, a good idea is to shop around – talk to different banks to make sure that they know what they’re talking about and that they have the right amount of knowledge to support your aims and ideas. The ones who understand your own particular business needs will be worth considering. It’s also worth checking out which ones offer the best deals and support. Either pay a visit to your shortlist of banks in person (which will allow you to make that initial contact) or trawl the web for any potential lenders. Understand the different incentives and offers, such as free transactional banking terms, payment holidays as well as the charges that the banks may put on you for security costs and valuation fees. It’s also worth familiarising yourself with all the business jargon, legal terms and small print that may prove to be a problem.

In short, the key is research. Do research on the affordable businesses that hold potential for you. Research the banks that offer the best deals. And prove that you have the research skills by producing a sound business plan. That’s the key – now unlock.