Where will you find the funds for buying a business? Well, there are a variety of ways financing the buying of an existing business can be done, but only a few are even worth pursuing.
Keep in mind that knowing how you will fund a business purchase should be on the top of your list of things to do while preparing for this new venture. If you have anything less than $25,000 in liquid assets available to use for a down payment, you will have a very hard time taking on a business worth buying. You would be better suited trying to start from scratch in a low entry cost industry such as a service or consulting business.
How Much Money Should You Have Available?
You should figure that whatever business you end up buying, you can safely afford only those that you can at least come up with 30% of the total funds for buying a business as a down payment. If you planned on finding a deal where you pay nothing down, someone has been feeding you a lot of baloney. Without at least 20% available to you, just about any source of funds is not going to give you a second look.
100% Buyer Financing Financing a deal 100% with your own cash is also not a good idea. This is rarely done as should be the case. If the business you are buying is going for well under $100,000 then you can consider fully paying for it. I would strongly recommend that you also don't offer all cash on any deal unless you are getting a discount from the full valuation of the business in the 15%+ range. In addition, you'd better have more money available as back-up working capital while you are getting a feel for this new business. Two full months of expense coverage is a good starting point. Even more is recommended if you are buying a business that must carry inventory. In this case, also be aware that inventory is often not included in the asking price of the purchase.
Traditional Bank & SBA Loan Funding When figuring out your options on funds for buying a business, there are two paths you really should not have on the top of your list.
The first source of money to forget about is traditional bank lending. Financing the buying of an exiting small business is not something a bank is readily willing to do... without a lot of guarantees.
The second source of funds for buying a business to avoid is an SBA loan. Many people think that an SBA loan is covered by the government and therefore does not need to be paid back. VERY, VERY WRONG. The SBA just supports the loan. The actual money is loaned to you by an SBA certified lender, which is a traditional bank. And you do need to pay it back.
Other Funds for Buying a Business There are many non-traditional lenders that are more than willing to fund your business purchase. Many of them specialize in business purchase loans especially for specific type of businesses such as high risk industries such as restaurants.
Their guidelines will be less stringent but often they will be based very heavily on your personal credit and your personal assets for collateral. Some though, will take the business assets as collateral, which won't happen with a traditional bank unless real estate is involved. Although their interests rates will be less than favorable even if you have great credit, you will often have an opportunity to get a longer term loan. Sometimes up to 10 years.
These sources can be found all over the internet and also most likely right in your home town. Sometimes it is a good idea to get help with finding a loan.
Other Government Backed Funds for Buying a Business If you are a military veteran, there are additional options for you to pursue. If you are interested in buying into a franchised business, there is a program called VetFran (Veterans Transition Franchise Program) that the government runs. It has 200+ participating franchises that are already pre-eligible for government backed loans.
There is also another SBA backed government program called VBOP (Veterans Business Outreach Program) that can be of great assistance.
Seller Financing In many cases, the funds for buying a business come from seller financing. Basically what this means is that the seller acts as the bank and holds a note for the buyer. Of course, this type of financing is very often short term (less than 5 years) and it will also require you to put down 50%+ of the asking price. You can expect interest rates all over the map depending on the seller but with the help of a broker, the rates stay very close to those found in traditional bank business loans or less. I typically see interest rates in the range of 5%-9%.
This is by far the best way to purchase a business for a number of reasons. First of all there is a lot of room for negotiation as to the specific terms of the loan including length of time, rate, when the loan payments start and the flexibility to pay it off early to name a few. Although you will have to personally guarantee the loan, the collateral is actually the business itself. You miss too many payments and the seller will take back the business and you get no money back.
The best part is that it gives you peace of mind in knowing that the seller has basically validated the purchase by providing the financing. They are selling to sell, not take the business back. This will make payment terms very reasonable (they want you to be able to pay it back through the business cash flow) and it shows good faith towards the viability of their business. Ultimately it will also speed up the closing process by taking a lender out of the picture.
A Personal Guarantee Make no mistake in this fact though: Any loan, from any lender, will have some sort of personal guarantee attached to it. Only the truly large corporations of the world ever secure funding without the owners of the company being personally liable in one way or another.
Funds for Buying a Business - To learn more about this author, visit George J Sierchio's Website.
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George J Sierchio
(Visit George's Website)
George Sierchio is the President of Action
Business Partners, Inc. (www.actionbusinesspartners.com),
a small business advisory firm that
specifically works with current and future
small business owners on common issues
such as growth, funding, finances, time
management, employee problems, start-up
troubles, exit strategies and business
buying/selling.
Mr. Sierchio is an accredited Small
Business Advisor and a seasoned Business
Broker.
Before founding ABP 4 years ago, Mr.
Sierchio had over 11 years of experience
owning and operating several successful
small businesses in a variety of
industries.
He has personally started 5 businesses
from scratch, 2 with partners and 3
without. He has bought a business for
himself as well as sold one and has
brokered the purchase/sale of businesses
in a variety of industries for his
clients. This experience gives him a wide
variety of knowledge in all aspects of
business ownership that he passes along to
his clients.
For more information about business buying
specifically, please visit www.business-buying-help.com
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Buy a Business and Run It Successfully - If you have made the decision to purchase a business, your goal should be to buy a business and run it successfully. This blog will provide you with tips and insights in achieving this life changing goal.
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Venture capital, as an institutional asset class, is pretty much dead.
