The 5 Most Common Ways to Finance a Business Purchase
So, you’ve found the perfect business to purchase. Congratulations!
You’ve done your research. You’ve contacted the seller, worked through all the pertinent details and did your due diligence. You made your offer and, after some negotiation, you landed on an agreed-upon sales price.
You have your business plan in place for how you will run the business once you take over. But, before you can get to the point where you sign on the dotted line and obtain the keys, you need to figure out how you’re going to pay for your new investment.
Here are the five most common ways to finance a business purchase.
1. You Use Your Own Money
The easiest path to purchasing a business is to use money you have at your disposal. In this case, you would simply write one big check to the seller at closing. In actuality, you’d probably be wiring the funds to the seller’s bank account.
This option isn’t technically financing at all. You’d be purchasing the business outright at the time of sale, just as you do when you buy a bottle of water from the store with cash.
If you’re planning to fund the purchase price of the business in this way, you’d only likely need to show proof of funds to the seller. This can easily be done by print-outs of bank statements and a letter from your bank.
Whether this is a reasonable avenue for you to fund the purchase price of a business depends on how big of a purchase it is. Not too many people would be able to fund the purchase of a multi-million business sale through funds they have in their bank. If the purchase price is more than the cash you have on hand, you’ll have to opt for one of the other financing options.
2. Seller Financing
Seller financing is often the preferred method by buyers. In this scenario, the seller is the entity that’s extending payment terms for the purchase price. Instead of paying a bank or other financial institution monthly installments, the buyer will instead pay the seller.
The buyer and seller will agree on financing terms, which split the total purchase price into monthly, quarterly or annually installments — with interest. There will be penalties written into the contract for what happens if the buyer misses a payment or is late.
Sellers may not be interested in offering financing themselves, though. They may want all — or most — of their money up front.
3. Assumption of Debt
Another option is for the buyer to assume the company’s debt, along with purchasing its assets. This scenario will only be available in some situations.
First, the business must have debt that needs to be paid off at the time of sale. Or, it must have debt that can be transferred to the new owner. Some creditors will not allow debt to be transferred when a business is sold, for instance, or may require the buyer to go through an approval process.
If these conditions do exist, though, the buyer could potentially lower the out-of-pocket financing obligation by assuming the business’ debts. The buyer would be responsible for paying off the debt on the previously-agreed-upon terms. The seller would no longer be responsible for those debts, which could come off the top of the sales price.
Of course, assumption of debt won’t cover the entire purchase price. If it does, that would mean the company’s debt would equal what the company is worth. In other words, it probably wouldn’t be a great business to purchase because of all the debt.
Because of this, the buyer will still need to come up with some money to finance the remainder of the purchase price.
4. Traditional Bank Loan
A traditional bank loan is one of the most common sources of outside funding. Banks offer a variety of loan types — from mortgages to personal loans to business loans.
While you could use a personal loan to fund the purchase price, they often don’t offer favorable terms — and have high interest rates. At the same time, they don’t have as many requirements to qualify. So, you could opt for a personal loan if you don’t have extensive credit or don’t want to submit a business plan.
The best fit would probably be a business loan. You’ll want to look for a bank that has a business division and has experience giving out business loans. They’ll likely require you to submit details of the business you’re buying as well as your business plan to justify how you could make it successful.
Then, they’ll likely require to pay something as a down payment, as well as check your personal credit history and credit score.
5. SBA Loan
A loan backed by the Small Business Administration is also a viable option for many. SBA loans are backed by the government agency, but offered directly through private lenders.
The SBA offers a number of loan types. The most common is the 7(a) loan program. This program offers loans of up to $5 million.
There are a number of benefits of an SBA loan. First, the interest rate is capped, which keeps overall financing costs lower than other methods. Second, they can be paid back over five to 10 years, depending on the details of the loan.
Third, and potentially most important, they don’t have as stringent requirements as many traditional bank loans. The SBA guarantees a majority of these loans so that banks are more willing to extend financing to people starting a business, purchasing a business or investing in improvements to a business they already own.
Contact Sunbelt South Florida broker today to find out about all your financing options!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.