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Debt vs. Equity Financing in Supermarket Acquisition

Debt versus Equity Financing in Supermarket Acquisition

Have you experienced really wanting to buy something but you don’t have enough funds? What if you’ve fallen in love with a supermarket or a convenience store that you want to own, but the selling price is just a little bit too much for your budget on hand?

Don’t fret in case you find yourself in this situation. In this article, Aussie Supermarket Brokers, presents financing options available to help aspiring supermarket business owners achieve the store of their dreams. Basically, there are two major types of funding when buying a business: debt financing and equity financing.

 

According to Investopedia, debt financing is when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

Equity financing is the process of raising capital through the sale of shares in an enterprise. Equity financing spans a wide range of activities in scale and scope, from a few thousand dollars raised by an entrepreneur from friends and family, to giant initial public offerings (IPOs) running into the billions.

Talking about Debt

Amin Kayal, an entrepreneur and investor suggests that “if you have all the money and you are not a seasoned investor I would argue that paying all in cash is the best option. If you don’t have the money or you are a seasoned investor then financing a portion with debt is optimum.  It’s usually cheaper money and your return on invested capital is much higher.”

“Mostly everything depends on the terms of the debt,” according to George Alvarez, “but the pros are fairly simple: You borrow only when purchasing a productive (profit making) asset. Depending on the collateral used, you might keep other cash free for needed working capital. You get to maintain your share of ownership vs. going to outside investors. That is less expensive over time if the business is profitable, because you can pay the debt off, but profits are shared into perpetuity. The cost of the loan is reduced by available tax deductions, dependent upon the structure of the loan.”

On the other hand, physicist Mike Mian thinks that debt financing has its share of disadvantages because one can “risk losing the business if debt matures when cash flow is low.” Furthermore, Mike also believes that debt financing “devalues the business and can be a drag on growth if you get the debt loading wrong or capital is ineffectively deployed.”

And then there’s Equity Financing

In equity financing, investors become part owners of the business and they will have their respective share on the profits or the losses that the business may undertake. As such, investors will likely share their expertise and contacts for the business to protect their investments. They can also increase their share as the business grows and develops into a stable enterprise. You can also benefit from equity financing specifically if you’re issuing stock as a form of equity. In fact, with equity financing, you’ll be free from debt even when the business venture fails.

“In the event that your supermarket goes bankrupt, debt holders get paid before equity holders,” according to Services Management expert David Hetherington. “That is, when they come to liquidate your supermarket and auction off the inventory and fixtures, the resulting money goes first to the suppliers of meat, the electric power company, and so on. Generally, the shareholders lose their investment. Which is why you have to have a pretty profitable venture in mind before shareholders perk up and get interested.”

Consequently, you will have to consult all the investors in the decision-making process due to the fact that they’re part-owners of the business. Furthermore, if something goes wrong, your personal relationship with your investors may be affected especially when business goes downhill.

 

Are You Qualified for Financing?

Whether you choose to go for debt financing or equity financing, you will find it much easier to qualify for financing when you have a “presentation or documentation that easily proves you will be able to pay the lender back,” says Adam Istvan. “Basically the more details you provide and the more work you do up front, the greater your chances will be to get funding.”

“Most investors would like to make money.  If you do the more involved math, generally you need a business that can earn a profit of at least 10% or so before the numbers make sense for someone willing to take on the risk of losing their principal (i.e. the money they put up for stock),” adds Hetherington.

If you have been wanting to own a supermarket in Australia but you’re unsure if you are qualified and you don’t know where to start, all you have to do is book your Free Buyer Consultation with us. We’ll be more than glad to help you out.

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