Attracting financing can be a big job. Are you an entrepreneur looking for financing for a business property, a business acquisition or the growth of your business? These are your options in a nutshell.
Roughly speaking, there are three reasons why you need financing as an entrepreneur.
Content:
Financing a business property
Is your business on the rise or is your warehouse bursting at the seams? Then maybe it's time to look at a commercial property. There are lots of different properties offered online, and otherwise you can contact your local real estate agent for a specific search query.
Have you found a business property? Then pay attention to whether the building's zoning suits the function you want to use it for. For example, you may not keep a store in a building with an office function, otherwise you risk a fine from the municipality. You can also rent or buy a building. For the purchase, you have several financing options.
1. Mortgage
An obvious solution to your financial gap is to take out a mortgage for your business premises. You often have the same options for this as you have for a home: straight-line, annuity, mortgage loan or another mortgage type. Most banks finance about 70% of the market value of a property. The rest of the purchase price is up to you.
If you need a property quickly, some lenders can provide bridge financing. These are short-term loans that give entrepreneurs room to invest in property, but as mentioned, this is purely for bridging so that a regular loan can be taken out in the meantime.
2. Crowdfunding
Crowdfunding is gaining popularity. From charities to personal ambitions. A good story, a future perspective and an attractive return attract investors. Through a platform, you can ask investors to invest in your plans.
There are several platforms that specialize in real estate financing. In exchange for funding, you offer interest, dividends, a stake in the business or some other (tangible) compensation. Crowdfunding is increasingly used in SMEs.
Financing a business acquisition.
Until a few years ago, financing a business acquisition of several millions could be financed, so to speak, with an excess value of 150,000 euros on the house. Simply because the bank was willing to bridge the remaining gap - sometimes as much as 80-90%.
But those days are definitely over. Currently, banks want to finance a maximum of about 50% of the total acquisition sum. So the other half will have to come from your own funds and other sources of financing:
1. Own resources
First and foremost, an entrepreneur cannot avoid using equity capital. Because it is very simple: if an entrepreneur is already unwilling to take risks, why should a bank or other financiers? Banks, as well as investors, want a buyer to show commitment. They want him to "hurt" when things go wrong, because only then will he put maximum effort into making the acquired business a success.
The amount of equity is relative. A buyer who cobbles together a hundred thousand euros with all his savings, the surplus value on his house and the sale of his shares and is willing to put it all in, puts more at stake than a buyer who has a million in his account and only wants to invest a ton. No bank will want to shake out a buyer completely, but a buyer will have to put in a significant portion of his capital. The main sources of equity are savings accounts, stock holdings and the excess value on one's home.
2. Bank loan
Most buyers will not make it with their own contribution, so a buyer must look for other means. The most obvious method of financing is a bank loan. A major advantage of a bank - over an investor - is that the shares remain wholly owned (as well as control). Moreover, a bank loan is cheaper than capital from an investment company, which has much higher return requirements.
Never just walk into a bank, but make sure you are thoroughly prepared. That starts with a well-crafted financing memorandum; a combination of the business plan for the next three years and a rationale for the financing requirement. Many buyers tend to grossly overestimate the market and their own contribution and come up with the fanciest forecasts. Banks are used to such graphs in the form of a field hockey stick and are not so impressed. It is better to outline multiple scenarios: a worst case, a normal case and a best case scenario. A bank wants to see that a buyer can still meet interest and repayment obligations even in the worst case.
3. Investors
Another important category of capital providers are investors. Unlike financiers, they do not provide debt capital, but mainly equity and subordinated loans. They become co-shareholders, which is why some buyers deal with investors only when there really is no other way. Investors, by the way, offer more than just money. They often have a large network and knowledge of the market, from which the entrepreneur can benefit. The main investors in SMEs are private equity firms and informal investors.
Decide at the earliest possible stage whether or not to get an investor on board. Often an adviser can help with this. Also toward banks, it is good to have a private equity firm on board. Investors have an edge with a bank over an individual buyer. The very fact that the private equity firm is investing in the acquisition inspires confidence. In addition, after the acquisition, the investor will set up a supervisory board to oversee the business. In short, the quality of the proposition is higher than an individual knocking on a bank's door.
4. Subordinated loan
It happens quite often that the buyer does not get the financing. The asking price is two million euros, while the buyer estimates that his own money and a bank loan will not get him further than one and a half million. If the seller is eager to sell a business, he will not let negotiations break down. But he will also not be willing to simply drop the asking price by half a million. In such a case, the parties can agree that the price will drop to 1.8 million euros and that the seller will provide a subordinated loan of three tons. This is a win-win situation: the seller receives a nice price, while the buyer's financing problem is solved. different agreements can be made about the loan itself.
A subordinated loan is - the name says it all - subordinated to the bank loan. This means that the subordinated loan may be repaid only under certain conditions. For example, if solvency is at a certain level or if the total expenditure on repayments and interest does not exceed a certain percentage of free cash flows. Usually, interest is paid on a subordinated loan immediately, but it is repaid only after a number of years or when the bank loan is repaid in full. Subordinated loans are very common in SMEs. A condition for such a construction is, of course, that it is justified for the buyer: he must be able to pay the interest and repayment from the future cash flow.
5. Earn-out
Another possibility to get closer is the earn-out. This means that part of the purchase price depends on the company's future profits or revenue. For example, the buyer pays one and a half million euros immediately and another three tons when profits reach a certain level. If profits are lower, the additional amount is forfeited or paid pro rata. This arrangement is used in particular if the seller has far too rosy expectations about the future in the eyes of the buyer. He is only willing to pay for these expectations if they come true.
6. Family, friends & fans
If it is difficult to obtain financing or if your own network sees potential in your future plans, then family, friends & fans may be able to help. Especially if you can make good agreements with each other about interest, repayment time and other conditions. However, it is wise to determine in advance whether your relationship can withstand possible setbacks. What happens if your lender within the family suddenly needs a lot of money himself or if you are tight for a month and cannot repay. Think carefully about involving your inner circle.
Financing other growth
For entrepreneurs, it can be an interesting option to fund the growth of their business or strengthen the financial position of their business by selling a minority stake to an investor or a strategic buyer.
The good news is: for such a business loan there is still plenty of money available from wealthy private investors (informal investors), investment companies and larger (family) businesses. Moreover, these parties - besides money - also bring useful knowledge, experience and an interesting network.
In practice, this usually involves selling part of the shares between 10 to 40% in exchange for strengthening the equity by 150,000 to 1.5 million euros. By doing so, you do give away a piece of your shares to the investor, but you can also more easily achieve your intended growth. Such a participation is a direct capital injection, which has the great advantage that it also significantly increases the chances of obtaining an additional loan from the bank.
