One of the facts of businesses is it requires some form of financing. This applies to startups and even newly acquired businesses as well.
Just to make it clear, I want to make a distinction between a startup and a newly acquired business. The former is where you have a grand idea or plan and you want to create a business that will put those ideas into reality.
The latter is where you acquire a certain business, may it be from purchasing it or through inheritance.
Now, when it comes to financing, which one is better? I will go over some of the pros and cons of both. Let’s start with the Startup.
Financing a startup can be easier or harder depending on your financing options. You can try crowdfunding or you can even use your own resources and bootstrap your venture. There are also some people who fund their businesses through personal loans, title loans, among others.
For some, it might be hard due to the fact that financial institutions have stringent requirements when it comes to getting some SBA loans, for example.
Some people even opt to get their financing through angel investors or venture capitalists. The main challenge to startup businesses is that whenever they choose to have it funded by other people, they have to make sure that their business is going to become a profitable one.
They not only have to pitch the idea, but they also have to have a projected or expected profits/earnings as well.
Another problem that startups face may be that of a short-term cash flow. Yes, you can acquire some money from financial institutions, but they will have a hard time getting their loans secured due to the fact that startups are not “established” businesses or ones that have a successful and proven track record.
Financing acquired businesses, on the other hand, might be easier for some. You see, whenever you need to take out a loan because you need it to increase production or if you’re planning on expanding, financial institutions will be more lenient since your business has been around for so many years.
Now, if you’re purchasing an established business, you may even have the seller assist you in the financing.
You can get amazing interest rates and they do not require stringent credit reviews. If financing it would require collateral, the existing properties can be put up against the loan and you do not need to sacrifice a lot.
Of course, there are possible dangers to this. Since the seller has already signed their names on pre-existing debts and contracts, they will still be held liable and that might mean problems to your newly acquired business.
Unless you and the seller create a subordination contract (in which you will assume full responsibility now of the pre-existing debts instead of the seller), the seller will still be held liable until you create such an agreement.
Financing both startups and newly acquired businesses have their own pros and cons. For startups, they might have a hard time getting financing from banks since they still do not have a proven track record, but they can resort to other means such as crowdfunding, bootstrapping, personal loans, etc.
For newly acquired businesses, they might get a better chance of financing through financial institutions because of their track record, but they can also have problems if the seller has pre-existing debts.
Whether you create a startup or get a business through acquisition or inheritance, there are pros and cons when it comes to financing either of them.