Whether you’re looking to acquire a business personally, for a fund, or to bolt-on, funding plays a pivotal role in getting to the settlement line, and success thereafter. Financing your business venture , two primary paths lie before you: self-funding and debt funding. Each method offers distinct advantages and considerations that can shape the trajectory of your investment.
This blog will outline these considerations, explain how to self-fund your business and provide insights into business debt financing.
What is self-funding in business?
As the name suggests, self-funding refers to using personal savings, investments or assets to finance the acquisition of a business. It involves leveraging your own financial resources without relying on external loans or investors. Self-funding a business offers the advantage of retaining complete control and ownership after completing the transaction.
Owning a self-funded business offers several advantages for potential buyers. It allows for complete autonomy and decision-making control, as there are no external investors or lenders to answer to. Buyers also avoid the burden of interest payments, potentially increasing their overall profitability in the long run. Self-funding a business eliminates the need to provide collateral or personal guarantees, reducing the associated risks and obligations.
However, choosing to self-fund businesses comes with its own challenges. The availability of personal funds may limit your budget, potentially causing you to miss out on opportunities for rapid expansion. Solely relying on personal finances can also strain your financial security, as the entire investment is at risk.
Business debt funding — what is it and is it right for me?
Debt funding involves borrowing funds from financial institutions, such as banks, credit unions or private lenders, to finance the purchase of a business. This solution allows buyers to attain a larger capital upfront while spreading the repayments over a fixed period.
While there are various types of debt funding, such as traditional bank loans or peer-to-peer lending, business debt funding typically involves an interest rate and requires collateral or a personal guarantee to secure the loan.
For those with limited capital or who prefer financial flexibility, debt funding can deliver several benefits. Business debt funding provides the opportunity to acquire a larger capital amount, enabling the purchase of a more substantial and potentially more profitable business. As these are most typically in the form of loans, debt funding allows borrowers to spread the cost over time, easing the immediate financial burden and granting more flexibility in cash flow management.
Of course, business debt funding also entails certain disadvantages. Once loan terms are accepted, the borrower must repay the principal with interest, increasing the acquisition cost. There is also an element of risk with debt funding, as loan defaults can damage a borrower’s creditworthiness and potential collateral loss.
Two factors to consider when determining the right course of action
When deciding between self-funding and debt funding, potential buyers should carefully consider two crucial factors:
Consider your current financial resources
Review your available funds, taking into account potential risks and the need for emergency capital. Understand the impact of using personal assets and the cost of allocating these resources for the purchase.
Identify financial projections of the business
Determine whether the business can generate sufficient revenue to cover loan repayments while providing a return on investment.
Deciding whether to self-fund a business or use business self-funding to purchase a business ultimately depends on the buyer’s personal financial situation, risk tolerance and long-term goals.
If buyers have sufficient personal funds and are comfortable taking on the entire financial responsibility, self-funding can offer a sense of independence, control and potential long-term profitability. Alternatively, debt financing provides an avenue to acquire a larger business and spread the financial burden over time, accelerating growth.
Uncover your next business opportunity with Resolve
Funding your future is a crucial step in the entrepreneurial journey. By making an informed and strategic decision, you can set the foundation for a prosperous and fulfilling financial future.
To keep your prospects organised, you need a source of truth. The Resolve marketplace is a centralised platform that allows buyers to browse listings and enquire about small to medium-sized businesses for sale. Learn more about our unique business marketing place by reaching out today.