There are nearly endless reasons why one might want to buy an existing business, ranging from a known track record of success, an established customer base, and proven cash flow. However, not everyone has the money available in the bank to support such a large purchase. As a result, most buyers turn to some form of financing.
Let’s take a look at some of the most common methods available to finance a business. Feel free to reach out to our business brokers in CT, VT, NY, MI, PA or NJ if you’re interested in advice on financing.
It goes without saying that some buyers do indeed have a lot of money in their savings account. Perhaps this funding is sufficient for purchasing a business outright. Some buyers have been planning to buy a business for quite some time and have set aside the funds. Yet, more often than not, a purchase of a business is a combination of savings and loans. Most buyers in this situation have personal assets to use, such as stock investments, money from their bank account and mortgages against their homes.
Conventional Bank Loans
You’ll need a great credit score and proven track record, but it is possible to get a loan from a bank to purchase a business. Lenders will want to consider not only your personal finances, but also the finances of the business to be acquired. They will look at everything from the business’ tax returns to their profit margin. Before agreeing to give you a loan, most banks will also want you to put down a substantial amount of the loan amount. They may also require that you have assets to be used as collateral as well as relevant management experience. An Inbar Group business broker in New Jersey, New York, Maine, Vermont, Pennsylvania or Connecticut can advise you if you’re looking to find out if a loan might be a good fit for you.
An SBA Loan is a loan backed by the Small Business Administration (SBA). While the SBA itself doesn’t loan you the money, it still can be tremendously beneficial, as it provides guarantees for lenders who can help you. This loan can’t be 100%; it is usually up to 90% with the expectation you pay the rest. You’ll want to have at least three years of tax info, personal financial info and proof you have the experience necessary to run the business.
Many sellers are willing to help you pay for the business through seller financing. That means that they will let you pay back the loan over time. When sellers offer seller financing, it shows that they have confidence in the business and its ability to generate revenue. The seller essentially asks like a bank and covers 5% to 20% of the costs, which you will then repay with interest. Our business brokers in CT, VT, NY, MI, PA or NJ can help you to determine if a seller might be open to this kind of financing.
Leveraged buyouts can potentially work for a business of any size, as long as it has assets to leverage, such as equipment, inventory and real estate. The business assets then end up being the collateral for the loan, in combination with some of your own assets. This option can be attractive for buyers. Instead of using all of your own assets to pay for the financing costs, you’re also using the seller’s as well.
While this is often very difficult to secure, some buyers find a private investor or family office to help them. Private investors can be far more flexible on terms than banks; however, you can also expect private investors to be very selective.
Getting Started with Your Purchase