Understanding Funding for Small Business – A Guide on How to Buy a Small Business

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Your billion-dollar idea requires a million dollars? Thinking of buying a business? All you need is funds!

According to its definition, it is easy to understand what a fund is and how it works. In terms of “funding for small business”, funding refers to a collection of different people’s money with the intention to start a small business. Lots of creative ideas for small businesses get wasted due to the lack of funding.

A good start is to decide whether you want to start a small business or buy a small business, then gather ideas on how to collect funds based on your requirement.

Grants vs Loans

Many confuse themselves between a grant and a loan. A “grant” is a gifted money that you do not need to return back while a fund is loaned money that you need to return back. A loan application is considered only if you are able to pay it back. 

Ways to Fund your Small Business

Access to funding can be very crucial for a small business, it determines its existence. While the amount of funding depends on the size of the business, industry, estimated time and the purpose of the small business, here are possibilities you can consider:

Family and Friends

You can get easier access to your required funds without high interest rates. You do not need a lot of financial background requirements. Family and friends do not require much other than trust. But failure to pay back the money could take relationships to a rough turn. 

Banks

It is a trusted and well-established source of funding. Bank loans are a popular option to be explored by young entrepreneurs. There are a number of small business loans available for new businesses. Banks can have rigid lending requirements and the process of securing a loan can be slow, it might take several weeks. 

Online lenders or funders

Through a simple online process, you can acquire a quick access to funds. Make sure the source has a good reputation and reviews, also compare multiple options. Take into account the interest rate, fees and early payment penalties. 

SBA Loans

There are different types of SBA loans you can have access to and they have unique eligibility requirements along with different programs. The approval process is slow, can take up to a few months. A down payment may be required, also low-credit applicants may not be approved. 

Credit Cards

For funding a small business, you can explore this option to gain quick access to capital. It could be a good option for short-term funding needs. If you are sure that you can return the money before the interest rates start to kick in, you should go for this option, though interest rates can be high.

Small Business Grants

As said above, you are not required to pay back a grant. You could also consider this option and avoid racking up a debt. You get the funds you need without worrying about interest rates and repayment plans. Small business grants are not for all. They target specific groups like minorities, veterans, women, or businesses in the areas of scientific research and economic development. 

Crowdfunding

This process allows you to ask for small donations from a large group of people. Your business idea should be convincing enough to encourage donors to donate. By telling an engaging story, you’d need to appeal to human emotions for this. Your backers will need to know what their money will be used for. Crowdfunding depends on the idea of value for money. What value will your cause provide if they invest in?

Angel Investors

Individuals of high-net worth willing to take a chance on your idea, they know there’s no guarantee the idea will pay off but they hope it will. You can find angel investors through good networking using online platforms to connect with entrepreneurs who have accredited investors.

Buy a Small Business

Your funds can be used to start a new business or you could choose the easier route and get funds to buy a small business. Building a business from scratch is hard work without the guarantee if it’ll work or not whereas an established business has already been through the hard phase and generating revenue. Launching a new startup will require a good amount of capital up front while on the contrary, when you buy a small business there’s less work to do. 

If you are considering to buy a business, here are some things you might want to consider.

The Intention Behind the Trade

It’s important to consider why the owner wants to sell the business. There could be many reasons, debt, retirement or can’t afford to run the business. Find out as much as you can about the business. Talk to employees, read client testimonials and reviews, examine the equipment and see what kind of shape it is in, gather all information to satisfy the reason you want to buy the business.

Cost Consideration

The purchase of the business is not the only cost you’ll have to pay when buying an existing business. You may have to upgrade the equipment, if it’s outdated. Employees might leave because of new ownership; you’ll have to hire new ones. You’ll have to consider the money you’ll be investing in the fees to get required licences under your name. review your cost considerations to ensure you have the cash flow to cover these costs.

Business Valuation

Is the price you’ve settled on market compatible? Search about the value of the business in the market and see how accurate it is. Include tangible and intangible assets, real estate, monthly retainers, accounts receivable and debts in your business valuation.

Debt

Consider if the business has outstanding loans or other liabilities. Discuss who’ll be responsible for paying them, the previous owner or you. Previous debt may start you off on the wrong foot, negotiate this part so that you’re not burdened with another debt.

Business Plan

Ask to see the business plan of the company. Learn about the business operations performed in the system. This will help you understand the vision of the business and how well it is aligned with it.  

Funding a Small Business

Before you buy a small business, you need to ensure you’ve calculated all costs along with the sale price. Your purchase may require some major changes like hiring, training or the purchasing of new equipment. Avail the ownership opportunity to make necessary improvements. A few good changes might bring in more customers and send a message about the new ownership. Include all costs when you apply for a fund.

If all goes wrong

There are certain disadvantages of buying a business. Debt is one of them. Inheritance of liabilities like debt can result in a downfall even before the business starts. You may not be aware of other issues until you take over the ownership and see for yourself. Minimize your startup costs based on the nature of your business and the products and services you intend to sell. Get a clear picture of your approximate costs; staring a business or buying one. Funding a small business requires a lot. There’s lots to think and lots to consider. Analyze your choice from every aspect to completely satisfy yourself. 

Approval of funds can take time. And with higher interest rates you’ll be in lots of debt. Make sure you choose the source of your funds wisely. 

 

There are so many reasons your business could fail but with the right amount of funding from the right place could work wonders in helping you establish a strong ground for your business. Whether you want to buy one or build a business from scratch you’ll need lots of money. Don’t let lack of funds let your idea get wasted. No matter what path you choose entrepreneurship is always a good idea. There’s also learning in failure!

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