When buying an established business, there can be several commercial funding options to explore. As a rule of thumb, the most appropriate type of funding depends on the nature of the business being acquired and the risk of the investment.
Generally, the lower the risk, the greater the access to financing options, from traditional business loans or equity loans to government grants, asset-based and alternative sources.
1. Debt Financing
The ability to finance business acquisition begins with the strength of the "sponsor".
- How reliable are they?
- How much capital are they committing? (Also known as 'The Hurt').
- Do they have the experience required to operate the business?
- What are the industry trends, and how much inherent risk is in the industry?
These factors, among others, will dictate Credit Providers' appetite to support the sponsor.
Types of Debt Financing
a. Acquisition Funding
The debt used to acquire the business is typically funded by a loan with repayment over a set term. As a rule, consider the duration for which the business assets will provide a benefit. The loan term should match that benefit. The level of risk and/or the collateral provided will determine the terms of the funding.
TIP: The level of risk and/or the collateral provided will determine the funding term.
b. Working Capital Funding
The funding needs of the ongoing business are mutually exclusive from the funding needed to acquire it. Typical working capital funding structures may include:
- Lines of Credit: A flexible facility for managing cash flow or unexpected expenses.
- Business Overdrafts: Short-term solution to support the seasonality of cash flow.
- Equipment Loans: Funding for vehicles, machinery or other assets, secured against those assets.
- Invoice Financing/Factoring: Funding unlocked for unpaid invoices to bridge working capital shortfalls.
TIP: Working capital on hand at purchase is separate from the acquisition price and needs to be taken into account.
2. Equity Financing
Equity Financing has a different profile from Debt Financing. Returns are contingent upon the business achieving profits that then drive dividends/distributions to shareholders/owners.
Equity Financing can therefore suit high-risk or start-up acquisitions. Or where cash flows are less predictable or need more time to develop. Sources of this type of investment, beyond the purchaser, may include:
- Friends & Family: Early-stage funding that is easy to obtain and structured with flexible repayment terms. (Contracts are recommended to avoid unnecessary damage to personal relationships.)
- Angel Investors: Groups or individuals who provide capital contributions and business guidance in exchange for a share of ownership. Typically, an avenue explored by start-ups.
- Venture Capital & Private Equity: An initial or staged investment, usually requiring a share of ownership and a defined exit strategy. Venture capital firms often work closely with the business owner or CEO and have one or more seats on the board.
3. Government Grants or Programs
There are many state and federal grants available to business industries in Australia. You'll need to meet all eligibility requirements and submit a well-prepared application. Professional grant writers or specialist industry consultants can assist here.
Government Grants: These are non-repayable funds granted for specific business activities such as innovation, research and development, exporting goods or talent, and employment. Funds must be used for the intended purpose, often with milestone reports and final acquittals required to validate that the grant conditions have been met.
Government-Backed Loans: These are low-interest or guaranteed loans for qualifying businesses. The selection of loans on offer changes frequently. Joining industry authorities and networking groups is a good way to keep informed.
TIP: Always seek advice and be aware of any ongoing limitations or exit conditions for government funding programs.
4. Alternative Financing
Less traditional forms of funding exist, each with its own pros and cons. These include:
Crowdfunding: Raising funds from the public (crowd) in small amounts to achieve a sizeable result, often via online platforms. The offer can be equity-based or reward-based, or both. Crowdfunding is a method used by innovative and social cause business ideas, or to ‘save’ a business experiencing financial stress that is highly valued by the community.
Peer-to-Peer Lending: Where niche lenders are connected to borrowers via online platforms or other means.
Merchant Cash Advance: A shorter-term, high-interest solution that allows lump sums to be advanced against future sales, common for retail and hospitality.
What business funding is best for you?
Choosing the right funding mix when buying a business is crucial. An approach that balances risk, return, and operational needs will likely lead to a sustainable and successful business acquisition.
An MCP Commercial Finance broker can partner to work alongside you to assess business opportunities and advise on appropriate funding options.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au
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The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.