Borrowing money to buy a business? First, read these 3 tips!

If you’re in the process of borrowing money for a business loan, there are several key considerations that must always be taken into account, especially if you are new to creating or running your own business.

In a world where start-ups and freelancers are sitting in almost every café across Australia, you need to be sure that when you are exploring the idea of running a business, you have a deep understanding of business as a whole.

It’s vital business owners understand the types of products and services you will be offering to the market and the risks you run when you step into a business loan to help with the running or purchase of your business.

In this article, we explore the three tips you need to consider before you sign on the dotted line for your business loan.  

Pay close attention to your business plan

Failing to plan is planning to fail and one area often overlooked by individuals starting out or taking over a business is a detailed business plan. This provides a roadmap for your business to effectively run now and into the future. They are generally required by banks for loans or for alternate forms of investment, a business plan clearly outlines your expected performance and path to success.

Your business plan will outline strategic objectives, financials, management, sales as well as the ‘big picture strategy which will show lenders how you plan to spend their money, but more importantly how you plan on paying them back over time.

If you are looking to acquire an existing small business, you should clearly understand everything there is to know about the history of the business as it stands and a business plan can help to provide this valuable information.

Approach a venture capitalist  

Venture capitalists or VC’s are a source of funding – especially for start-ups – and are investment funds that manage the money of investors who seek private equity stakes in startups and SMEs (small to medium enterprises) with strong growth potential. 

They often expecting ten times their returns in less than seven years if you meet their criteria VC’s are often touted as the fastest way for a bank cheque to be written to your small business.

Venture capitalists sit with dozens of start-ups and SME’s seeking funding almost daily, they understand the numbers and comprehend when something doesn’t add up, so don’t approach a VC without knowing your balance sheet, understanding your market, reviewing the opportunities and being clear on every part of your business.

When you’re in talks with VC’s it is important to be aware that business owners seeking finance or business loans should never underestimate them calling in their finance or taking control of your company should you not follow the commitments laid out in your business plan.

Explore a line of credit

Traditionally a line of credit (LOC) was offered to a business as a low-interest method to bridge the ever-present gap between invoicing and cash received in your bank account.

A line of credit works similar to a credit card without the huge interest rates that are usually charged. They are secured by an asset – such as your home – and you only pay interest on the amount you borrow, not the total amount available to you.  

The benefits of a LOC are evident when individuals have an existing business with a LOC and are looking to establish or build another. Business owners in this instance can access the funds and then pay them back – like a loan from one business to another.

This removes the need for establishing new lines of credit, bank loans, credit cards or financing facilities, all because you have an existing and paid up line of credit available.

There are many ‘watch outs’ when looking to borrow money to finance your business including high-interest rates, credit card debt and the assets you use to secure your finance in the first place – such as the family home.

The key for small business owners (or soon to be small business owners) looking to borrow money to fund a new venture is that you develop your business plan, understand all the products and services available to you and your business, and that you seek expert & qualified independent financial advice before making any decisions.

 

Author: Hayley Clark

Content Specialist

Hayley Clark is a content writer born and bred in New Zealand. She has been writing, editing, and working in the industry for over five years, for a myriad of companies, including Virgin Money, Thrifty, Destination New South Wales and Michael Page.