What you need to buy a small business
If you are a prospective business owner, you’re probably in the process of gathering all the information you could to know how to manage your finances and get the ball rolling. The biggest question we get asked from people looking to become a franchise owner is how much is it going to cost, where is the money coming from and how long will it take me to start earning an income?
The capital required depends on the type of business you’re launching.
There are different kinds of small businesses you can own. It could be anything from a start-up, a franchise or anything in between. Even within each category, there are a few options you could choose from but the most important factor that determines which sector you could enter is directly related to how much money you’re willing to put in.
For instance, you might not be interested in starting a business from scratch and the idea of franchising a well-known business that has a successful business model sounds more appealing to you. You could buy into a large fast food franchise but that would mean a big lump of capital needs to be paid upfront, as you would need to cover the costs for all the equipment and get a spot-on location with high foot traffic.
On another note, you could lower your set up costs if you started a service-based franchise, like mortgage broking. You wouldn’t need an office with a good location, at least not in the early days. You can easily work from home and it’s highly likely that you would already have all the equipment you need to start your business straight away.
Set money aside for your daily expenses
Setting your business up is one part of the equation, having the business begin generating profit is another.
You would be surprised by the number of people who don’t invest enough money into their business and set enough money aside to live on.
That being said, most businesses start to generate decent cash flow after around 18 months (the average time it takes to become quite established) so you’ll need to have enough put aside for living expenses to get you through that period.
Options to finance your business
Knowing the options for financing your business is an essential aspect to make sure you have enough money to give your business the successful head start it needs to get its engines going.
Low-cost equity funding
You might be familiar with the term “equity funding” as it’s one of the most common solutions to getting funds pumped into the business, especially in the start. A company would sell their shares for investors and in return, investors would become shareholders of the company. What you might not have heard of is being an investor in your own company. In other words, you would tip your own cash into a venture. This money can come from various sources like a redundancy pay-out, inheritance or savings.
This is an inexpensive way of funding and if your business is successful, your investment will have a higher return. The only disadvantage is that you would need to have enough sufficient personal savings to invest, otherwise, your capital raising will be limited.
An alternative to equity is debt financing and that could be through an overdraft or a secured loan. As a small business, you would definitely have a few financing options to choose from no matter which financial institution you’re seeking help from. On the other hand, lenders view small businesses as high risk-investments and you would only be able to secure funds if could provide security. The most preferred asset you could provide to get your loan approved is your residential real estate.
Going for that option is quite the risk and you might want to take a few steps back before offering your home as security. If the venture didn’t perform as well as you had planned, you could struggle with loan repayments. You could even lose your home if your business fails.
That being said, lenders look favourably upon loans to franchisees when compared to start-up ventures. That’s due to the fact that franchisees have the luxury of being connected to a brand that already exists as well as having the support of a franchisor who want them to be as successful as they are, if not more.
Work out what’s best for you
Because there’s no one-size-fits-all solution to your financial needs or business situation, you could use a blend of different finance options to suit your needs.
Seek an experts’ advice and consult your accountant before making any drastic financial decisions.