How to buy a business with no money
Purchasing property with empty pockets can be tricky but it’s not impossible.
There are ways to do so but experts advise it is riskier, and more dangerous, and requires looking outside the box for possibilities and opportunities.
Read on for our guide to getting the best out of your scarce funds.
Can you start a business with no money?
Finance Brokers Association of Australia managing director, Peter White, advised short-on-cash buyers to consider raising capital via vendor or seller financing, ‘non-bank’ financial institutions, private investors and residential property equity.
REA Group economist Anne Flaherty also said crowdfunding was a good possibility.
Starting a business with no money
Mr White believes his list of suggestions could give buyers the capital necessary to back their new business, especially in the crucial first 12 months.
“Going in under-capitalised is very dangerous especially as with all new business ventures, there’s a period of time before you actually generate profit,” he said.
“You’ve got to be able to sustain yourself for the first 12 months or even longer.”
REA Group economist Anne Flaherty said low-cash buyers should also consider long term interest rates and ensure they can service their debt at a higher interest, if necessary.
Long term credit scores should also be considered.
“If you’re taking out debt to fund your business and then get into trouble and end up having to pay that debt [on a business that has closed down], this will have major consequences on your credit score,” she said.
“This will then impact your ability to borrow in the future.”
Despite the risks, Mr White said it was possible for first-time commercial buyers to complete a purchase without cash.
“You can do it without money but you’ve just got to do it with your eyes open and with the right amount of work, while understanding there are multiple options,” he said.
“If you’re getting into a new business, these options are worth exploring to see what makes sense.”
According to Mr White, this leverage is an ideal option for hard-up business buyers.
As the name suggests, this option sees the vendor agreeing to put off the full property payment for an agreed time rather than receive a lump sum on purchase.
Organising these special terms with the vendor can include utilising an asset you already own to cover at least some of your lack of capital and cash.
Be warned that regardless of these terms, finance situations will still see the vendors as having a direct financial interest in the business.
Vendor finance purchases can also effectively be higher than a lump sum payment as the vendor may receive interest on payments, along with tax breaks and business asset depreciations.
Residential property equity
Equity is the difference between a home’s current market value and the owner’s mortgage balance.
For example, a home worth $350,000 with $200,000 still owed on the mortgage has equity of $150,000.
This figure can typically be used as a deposit to buy a property, car or holiday.
Mr White said equity released from a home could be a worthwhile way to utilise more leverage.
However, he acknowledged it was risky to get into debt against your own home as you might lose it altogether if your new business doesn’t succeed.
Ms Flaherty agreed, saying while it was increasingly common to start a business using a personal home as a guarantee, buyers should be conscious of the potential risks of doing so.
Whether a family member, friend or someone else entirely, Mr White explained that private investors were a saving grace when it comes to a lack of business funds.
He explained plenty of new business owners have had “angel investors” providing capital for their business goals and dreams.
“There are people willing to do this if it all makes sense to them, and to the investment, at the time,” he said.
Mr White added that such investors might have already been investing in the business with the vendor and may simply choose to stay on with the new owner.
As with vendor financing, this situation provides a good chance to organise new terms.
“They might say, ‘we may stay here with a percentage of the shareholding or we may cash flow you into it’,” he explained.
“But you can come to some sort of commercial arrangement which makes sense for everybody.”
Ms Flaherty added that private investors were a great way for new business owners to share the risk burden, rather than risk their own home.
“These buyers can get finance from someone who believes in their business plus there is a benefit to this person if the business succeeds,” she said.
“At the same time, if the business doesn’t perform as well as you expected it to, or it takes longer to become profitable, your private investors are sharing the risk.”
‘Non-bank’ financial institutions and brokers
Next on Mr White’s list of best options is the wide range of ‘non-banks’ available, with many offering an abundance of great financing arrangements for cash-poor business buyers.
“There are a whole lot of non-banks out there who specialise in supporting business lending,” he said.
Mr White also recommended seeing a financial or mortgage broker as many specialise in business areas as well.
“You go to your doctor for a head cold but if you need surgery, you go to a specialist,” he said.
Ms Flaherty said as an alternative to the ‘big four’ banks, some lenders offered products that could be highly worthwhile.
She said a good example of this was GE Capital which has business investment products that don’t require director guarantees.
“This can be a real point of interest for some buyers,” she said.
“But you will have to pay a much higher interest rate because it’s far riskier to loan to a person who isn’t putting up anything to support their debt.”
Ms Flaherty suggesting sourcing capital in this way could be another way out for new businesses.
“If you have an idea and you want to get ahead with it, crowdfunding is a lower risk with a higher number of investors contributing to your plans,” she said.
“And by sharing the risk among crowd funders, you’re not beholden to the bank.”