a purchaser will need to meet the bank's debt equity ratios to be able to borrow
to fund the purchase of a business and the working capital needed in that
business sometimes the bank will fund it but what
happens if a purchaser cannot raise all the funds what's another option of
funding available to you to buy a business if bank loans are not available
there are many advantages to owning your own business it effectively affords the
lifestyle you're after and puts you in the driver's seat what often does not
fit into this perfect equation is the required funds to purchase the business
sometimes there is a shortfall if this happens have a look at this video for an
additional source of funding so I talked about how you can buy a business and not
have enough funding here approaching a formal lender is generally the first
option in acquiring the necessary capital however there are times and
situations when lenders banks cannot help or the process can be seen to be
too daunting and inflexible and sometimes buyers will avoid it
completely one viable option is to obtain financing from family and friends
as there is trust familiarity and a general level of comfort when dealing
with those with whom you know now this form of crowdfunding is a more common
source of financing for the purchase of a business than you might think
statistics New Zealand reports that just over a third of New Zealand businesses
seek additional debt financing now currently five percent of small
businesses in New Zealand are financed by friends and family although nothing
new and certainly not perfect when pursued in a manner that structured
honest and realistic it can be a sensible option to offset a funding
shortfall generally friends and family will be more flexible with loan terms
and conditions versus those imposed by the bank on a business cash flow level
they may offer financing without any firm security or accept less security
than banks they may also lend more money than banks sometimes with interest free
terms or a very low interest rate likewise friends and family may agree to
a longer repayment period or even payment holidays or reductions during
tough trading times now the loan process can be made more formal by including a
payback schedule and charging interest caution is needed however as friends and
family may mistakenly extend on their own commitments and then
be forced to ask for their investment back sooner than planned and probably at
a time when your business can least afford it
additionally family lenders may become impatient and start intruding into your
day-to-day business operations effectively micromanaging your decisions
and spending formalising in writing a verbal agreement made in good faith will
help maintain relationships and remove any ambiguity it ensures that both
parties share the same interpretation of the agreement the other drawbacks will
this self-evident is doing business with family and friends comes with many red
flags family loans if not approached correctly at the beginning can be
complex stressful and stir up bad blood and lingering regret and blame if
arrangements are misunderstood or if the transaction is viewed as a well informal
one treating a loan of this nature similar to how a formal lender would
treat a loan is a good start important factors to discuss and clarify include
formulating a strategic business plan forecasting business cash flows agreeing
upon realistic repayment amounts intervals and interest and clarifying
responsibilities over business management debt and liabilities it's
certainly a good idea that each party seek legal advice and draw up a formal
written agreement if you'd like me to put you in touch with some good business
and contracts lawyers let me know in the comments down below by taking some of
these steps buyers could successfully take advantage of this very viable
financing option thanks again for watching if you want to know more about
business sales and want tips on successfully improving your business
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would love to hear from you until next time see you again