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How should I fund the purchase of an existing business?

How to fund purchasing an existing business.

Entrepreneur

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When buying an existing business, the first option usually is to contact the traditional banks for finance. It all depends on the type of business and whether it is a new start up or the taking over of an existing business,” explains director, Louis van Zyl, of Renwick Business Brokers.

A deposit is required

Banks need some deposit as well as collateral. The deposit will depend on the type of business and the credit worthiness of the buyer. The deposit can be as high as 50% of the purchase price.

“A finance deal can also be structured – stock can be financed with an overdraft and equipment either with a lease agreement or a hire purchase agreement. Financial institutions are not keen to finance goodwill,” says van Zyl.

Bank Financing

Banks take the following in to account when considering the financing of a business:

  • Trading history of the business such as: How long in operation, how many previous owners, products to be sold, where located, customer base, reliability of suppliers, competition and lease agreement.
  • The assets – equipment belonging to the business – will be used as collateral and thus the banks, as well as the buyer, must ensure that these are in good working order.

As mentioned above, if the assets are new, these can be financed with a lease or hire purchase.

Debtors and stock can be ceded

Debtors and stock may be ceded to the bank as part of the collateral and thus the bank will need at least monthly certified debtors’ schedules.

Every cent that any financial provider lent to a borrower must be repaid, plus interest on the capital. Because of this the banks will have to ensure that the business is profitable and will be able to meet the monthly repayments as well as be able to continue to provide an income for the owner.

Do you have the right skills?

As a business and the owner are closely linked, the banks will ensure that the operator has the necessary skills and knowledge to run the type of business being bought. Whenever finance is applied for, the bank will need surety for the money lent. They must ensure that, should the business not succeed, the borrower will be responsible to repay the monies lent.

Other Funding Vehicles

“There are some financial institutions that have other finance options available – Khula Indemnity Scheme requires less deposit and Business Partners have other requirements, but all will take in consideration these aspects as mentioned above. Another way of finance which is easily obtainable is Seller Finance. In this instance the seller will finance part of the purchase price at a rate and repayment term as agreed upon. Usually the seller will retain shares in the business as collateral,” explains van Zyl.

The entity will want to see that your research and preparation – as presented in your business plan – supports the notion that you business has a market and the ability to be profitable and sustainable. Most importantly from their perspective, you will need to convince them that the company will be able to generate sufficient revenue to cover costs and repayment of their loan.

Finding finance to buy an existing business when there is little security

Before you try to raise money to buy the business, check the financials of the business you are thinking of buying.

Is the business worth the price?

Make sure that the business you are buying is worth the purchase price and ask a professional such as an accountant to investigate the profitability of this business. You must be prepared to assess all business records and search for any “skeletons in the cupboard.”

This information can be found by obtaining important business documents such as financial statements, tax returns, leases, etc. You can also gain information through observation and by talking with employees (if given permission by the seller).

You do not want to buy the business and then find that the appraisal was inaccurate, or the former owner’s misrepresented the company’s financial situation. If the owner had a bad reputation, you would inherit prejudices of former customers and suppliers.

Alternative financing methods

Sometimes finding finance for an entrepreneurial venture is not always possible, but not having capital isn’t the end of your business idea. There are other options including bootstrapping, a partnership or an angel investor.

Take a partner on board

Consider finding a partner who has the money to invest. There are two kinds of partners – active in the business, or silent. A silent partner invests capital in a business but chooses not to play an active or public role in managing the day-to-day affairs of the company. It’s vital if you go this route to draw up a partnership agreement.

Angel investors

Angels come in two varieties: those you know and those you don’t know. They may include professionals such as doctors and lawyers; business associates such as executives, suppliers and customers; and even other entrepreneurs. Angel investors vary widely, but they are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday.

 

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Company Posts

Why Spartan Is Focusing On SME Funding And How They Can Support Your Business

Spartan doesn’t just fund entrepreneurial businesses, it is an entrepreneurial business. Kumaran Padayachee, CEO, Spartan reveals this is why his team understands SME financing needs and the unique challenges founder-led businesses face.

Spartan SME Finance

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fast-and-flexible_spartan

Historically speaking, entrepreneurs don’t typically have the quantity and quality of collateral needed to secure debt finance. It was this realisation that led Spartan to develop and deliver a solution that would help SMEs to grow their businesses, even though they didn’t always meet the criteria of more traditional lending institutions.

“We understand that many business owners don’t want to go the equity funding route, selling shares in their businesses in exchange for funding. Without the collateral needed to secure debt funding however, this is often the only route available to them,” says Spartan CEO, Kumaran Padayachee.

“We decided to approach things from a different angle. To service this sector, you need to be flexible. The same rules don’t apply as they do for corporates. To achieve this, we’ve assembled a team that really understands SMEs, their inner workings, the finance they need and the terms that will give them the best ROI for the funding they receive — after all, the point of funding is to help your business grow, so ultimately that’s what it needs to achieve.”

Spartan’s offers financing

kumaran-padayachee_spartan

At its core, Spartan finances small businesses (fast-growing companies with R5 million to R10 million annual turnovers) and medium businesses (R10 million to hundreds of million in annual turnover).

Spartan finances specialised asset finance (tech, software, plant and machinery, office fit out and furniture); working capital finance (bridging finance, medium term loans); and growth finance (expansion, BEE deals, acquisitions).

Working capital in particular is a big portion of what Spartan assists its clients in. “This is project and growth-related finance, and many of the enquiries are for working capital, for which there is a huge need in the SME landscape.”

Related: Financing That Backs Entrepreneurs

What finance suits your business?

As a debt funder, Spartan’s team carefully evaluates what the finance will be used for, and if the return is greater than the repayments — in other words, does finance make financial sense for the business?

“There are numerous ways that finance can be applied incorrectly by SMEs,” says Kumaran. “One of the first flags we look for is debtors age. If the industry norm is payment in 30 days, but a business is typically paid by its clients in 60 or 120 days, then we know there is something wrong with their internal processes.

Either the company is too shy to be assertive with clients, or it lacks the capacity or capability to invoice clients and collect cash. Either way, the result is a shortage of cash. Business owners in this situation apply for cash in order to be able to pay the bills, when they should be reviewing their business, pulling one or two levers, and improving their cash flows.”

Growing your business with alternative funding methods

On the other hand, there are many situations where working capital and bridging finance can help a business to grow beyond its own, organic abilities.

“A customer project or contract that requires a new product line or opening a new branch are both positive, expansionary situations. The problem is that there’s a lead time gap. You need to start the project, spend cash to hire people or purchase equipment, build internal capacity, deliver on the project and then the customer only pays you. Working capital and bridging finance allow the entrepreneur to do just that, and the company grows as a result.”

Bridging finance in particular is high risk and requires a large amount of flexibility, which is why more traditional funding institutions shy away from it. Spartan on the other hand offers revolving bridging loans to customers the team has worked with. “We understand this space, and our aim is to support the entrepreneurs within it,” Kumaran concludes.

Related: Alternative Finance – Filling The Gap

Alternative finance solutions

Spartan is an Alternative Finance company  that specialises in financing Small and Mid-sized businesses by providing: Growth Finance (structured finance for expansion); Specialised Asset Finance (equipment/machinery/technology/software/office fit-outs/energy/etc.) and Working Capital Finance (bridging finance & medium term loans).

Bridging Finance

Bridging Finance is available for one to three month terms and is ideal for contract or project-based businesses. It is a solution that assists businesses with solving cash flow issues due to growth-related challenges in their business and is either for a once-off need or for revolving business use.

Spartan is an Authorised Financial Services Provider 47631 and Registered Credit Provider NCRCP8669. e finance solutions.

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Funding

What do I need to do in order to get a successful crowd funding campaign?

Advice on getting the gold you need for your crowd funding campaign.

Ambassador Tal Edgars

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I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?

70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.

To get the best out of your campaign, I would strongly advise you do the following:

  1. Lay out your plan way in advance
  2. Keep a proper and well-articulated business plan
  3. Create a compelling story.
  4. Use the social media and start a social media campaign
  5. Frequently promote your fundraiser, connect and interact
  6. Dish out rewards and incentives
  7. To go viral, go for educative, informative and entertaining videos
  8. Be more than unique and creative as more exposure will translate to more potential pledges
  9. Choose the right crowd funding site for you.
  10. Know and understand your end target audience

 

 

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Funding

Where can I turn when banks are not helping?

Getting bank finance for my restaurant is almost impossible.

David Lewis

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Getting bank finance for my restaurant is almost impossible.  How else can I access the funding that I need?

Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.

Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.

The business cash advance

For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.

In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover.  For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.

The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across.  Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.

Quicker turn-around and more accessible

Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security.  It is also much faster, typically available within two weeks.

The advance amount is based on historical credit and debit card sales and pay overs are daily.   The costs are fully transparent and there are no penalties for late payments or extended payback.    However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.

As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.

Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.

What to use the advance for

The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc.  Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.

Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.

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