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Raising finance to buy a business

If you intend to buy a business, a number of financing options are available.

As much as you’d like to conjure a successful business out of the air, unfortunately, it's not a viable option.

However, buying a pre-existing business is as close as you can get.

It's important to remember that buying a business doesn’t come cheap and prospective buyers will need to invest a lot of time and money.

Equity funding or using one's own money is a sensible choice for some starting entrepreneurs. However, other prospective business owners may be better served by alternative sources of funding. 

Equity Funding

You can invest your personal money in the business by using your savings, selling some assets or cashing in an inheritance to put up the required capital. However, this carries inherent risks and may drain your finances.

With the initial outlay and operating expenses, it may take some time before your newly acquired business turns in decent profits. It may work if you can rely on another source of income from your spouse or partner to cover household expenses while your business takes off the ground. 

Bank Loans 

Banks have stringent assessment criteria and documentation requirements for approving a business loan. You must present a strong business case and prove it's a low risk proposition for them to grant you the funding.

A credible business plan with sound financial projections should provide convincing evidence of viability and income potential. Collateral that's equivalent to the loan's value is also required as security to cover potential loss for the bank.

Be prepared to submit the necessary paperwork to support your application, as the bank will examine audited accounts of the business in the previous years. Revenue forecasts are expected, including projected net cash flows after expenses and loan payments.

A robust business plan should indicate business objectives, strategies to achieve goals, target market and ways to expand the customer base. The plan points to the direction you intend to take the enterprise and this will be the basis for future performance to demonstrate its long-term feasibility.

The bank also needs a professionally appraised value of the business by a certified accountant or valuation specialist, a surveyor can assess the worth of a property-based establishment, such as a restaurant or a shop. The value of a non-property-based business such as a marketing consultancy firm may be calculated using a multiple factor, for example, three times its earnings.

Other necessary information include your identification card, proof of residency, bank statements, assets and liabilities, as well as the contact details of the business vendor or agent.

Bank loans may be short term at lower interest or long term with higher interest rates. Before deciding on a loan term, consider the impact of your monthly payment amount on your cash flow, particularly in the early phase of your business.

Private Investors 

Access to funding capital from private investors is an attractive alternative for entrepreneurs who face difficulty in obtaining loans from traditional sources. Financier "angels" are prepared to take calculated risks on businesses with strong potential, in exchange for high returns on investment within a defined period.

Private investment networks and associations in Australia provide guidelines, advice and opportunities for matching entrepreneurs with private investors. It's best to hire the professional services of a lawyer and accountant to draft a legal agreement for mutual protection of the interests of contracting parties.

Venture Capital 

Venture capitalists not only provide the funds to finance a business, but also function as business partners due to their high stake in it. Applying their strategic and operational expertise, they offer business management advice. 

Venture capital companies look for enterprises with lucrative prospects for growth and high yields within a short period. They share the risks in anticipation of their due rewards. The Australian Private Equity and Venture Capital Association Limited (AVCAL) has the database of venture capital companies. Further information is available on their website.

Government Assistance 

Government assistance at the federal, state and local levels is extended to small businesses who meet eligibility criteria. The government offers services in the form of advice and information on how to secure loans from financial institutions or funding from private investors. The local Small Business Centres (SBC) in Australia also provide guidance and respond to inquiries. 

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