How do I buy a business?
What type of financing options are available?
What if I don’t have cash or enough personal equity to make a purchase?
Financing is one of the most frequently talked about topics among buyers and our broker team, especially first-time buyers navigating the buy and sell process.
Whether your unique transaction requires a singular loan to purchase the business, or a multi-funding approach, there’s more lenders and funding opportunities available to potential buyers than ever before.
Starting with the most popular or more commonly known, here’s our list of funding options that will help you fund the business of your dreams:
Of all of the financing options available to potential buyers, seller financing is the most flexible. Also known as owner financing or seller carryback, the buyer and seller enter into an agreement much like a banking relationship. An amount is agreed upon and with this, the seller carries the note and the buyer agrees to pay the seller back—with interest—over a certain period of time. A quicker turnaround time for both parties, more fluid terms for the buyer, as well as a key financing strategy when traditional loans aren’t available and / or seller financing can be used to offset any limitations related to conventional loan options.
More widely known, traditional term or conventional loans are supported by private lenders as opposed to the government and with this, typically require a more significant personal and financial investment. A few examples include a 20-30 percent down payment, shorter and more stringent terms and a favorable credit score of 700-plus, among others.
Small Business Association (SBA) Loan
The Small Business Association partners with other lenders in order to offer small business owners’ government-backed loans with more flexible repayment terms, down payment requirements and lower interest rates. There’s a variety of SBA loans to choose from, each with their own set of unique qualifications. While the process for getting approved requires extensive documentation and paperwork before funding is released, an SBA loan is one of the best formal loan options available to tap into.
Buyers can finance their business purchase by leveraging existing retirement funds without risk of any tax or other penalties. There’s three different ways to achieve this, including a rollover, borrowing against and / or cashing out [your 401k].
Home Equity Line of Credit (HELOC)
Taking a second mortgage out on your home—or a Home Equity Line of Credit (HELOC)—will give you equity toward the purchase of a business. Following a proper business valuation to determine the cost of the business, you should take the next step in finding out [how much equity] you have available to you.
Consider reaching out to your current banking partner to gather some additional information and insight or, let our team answer your questions and provide creative solutions to your financing needs.