What do I need to buy a small business?

Owning a business can be a great way to make money. But like all good investments, you’ll need to tip some cash into the venture to get the ball rolling. The big question is, where should the money come from?

Knowing what you need in upfront capital is a key requirement of running your own business.

Owning a business can be a great way to make money. But like all good investments you'll need to tip some cash into the venture to get the ball rolling. The big question is, where should the money come from?

Capital requirements vary widely

Exactly how much capital will be needed to fund your business depends on multiple factors including the type of business involved. Buying into some of the larger fast food franchises for instance can mean stumping up several hundred thousand dollars to cover the cost of equipment and a fit out of the premises.

At the other end of the spectrum, many service-based franchises, like mortgage broking, have lower start-up costs as there may be no need for expensive equipment or a separate premises – the early days could see you work from home.

The amount of capital you need will also depend on whether you are buying an established business, in which case part of the purchase price will likely comprise an element of goodwill. Or you may be thinking about starting a new enterprise of your own.

Allow money to live on

The cost to set up your business only addresses one aspect of the capital requirements equation. It can take time for a new venture to generate a reliable cash flow. This being the case it pays to have sufficient capital to tide you over for around 18 months until the enterprise is well and truly established.

Back to the issue of financing your small business. There are several options available and each comes with pros and cons.

Equity – very low cost

One option is equity funding. In other words, tipping your own cash into a venture. The money can come from multiple sources like a redundancy payout, household savings or an inheritance. It's a very cheap form of funding, and if the business is successful your money can earn a healthy return.

On the downside, unless you have sufficient personal funds to invest, the extent of your capital raising may be limited.

Debt finance

An alternative to equity is debt financing like, say, an overdraft or secured loan. As small business tends to be viewed by lenders as a higher risk proposition, you will normally only secure funds at a reasonable interest rate if you can provide security. And, predictably, residential real estate is the preferred form of security among mainstream lenders.

It pays to think carefully before offering your home as security. If the venture proves less successful that you anticipated you could struggle with the loan repayments. At worst, if your business fails, you run the risk of losing the family home.

As an aside, lenders typically look more favourably on loans to franchisees than independent start-up ventures. That's because franchisees enjoy the backing of an established brand and ongoing support from the franchisor, who wants your business to succeed just as much as you do.

Work out what's right for you

Many business owners use a blend of finance options so it's a good idea to crunch some numbers to decide how much you need to buy a small business - and the most cost-effective and sustainable form of funding. Always run the various possibilities past your accountant before making a final decision.

To find out more about investing in a Mortgage Choice franchise call us today on 1300 650 330.

Posted in: Business tips

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