Buying a Business? Top Financing Ideas Beyond Bank Loans

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Finding the best financing options is an important step before buying a business.

The journey to buying a business can be both exciting and nerve-wracking, with financing often causing much of the latter. After all, no matter how successful the existing business is that you’re considering buying, and how confident you are in your ability to run it well, there’s no getting around the fact that starting or buying a business contains an element of risk.

Of course, the element of risk is a huge part of what draws entrepreneurs to this exciting life, so instead of dwelling on it, let’s focus on what options are available to savvy business buyers looking to fund their business dreams to fruition.

Popular financing options for buying a business

Once you’ve set your sights on buying a business, you will need to finance the purchase. There are generally three different types of financing to pursue:

Debt Financing

You can borrow money from an outside source, usually a bank, with an agreement to repay the loan with interest. In recent years, a number of private banks based primarily online, such as Kabbage and Lendio, have focused their efforts specifically on small business loans. You could also arrange for private loans from friends or family or even angel investors.

Sometimes, it’s necessary to take drastic measures like Dwight Milko had to do. Milko owns six ReMax franchise locations in the eastern suburbs of the Cleveland area. The housing crash that began in 2008 made impossible for Milko to secure financing, so he decided to cash out his 401(k) to get capital for his business, “a no-no by every financial advisor out there,” he admits. That motivated him to set goals to break even as soon as possible. “My goal was to break even within a year so that I could replenish that cash outflow that I had to lay out personally. I set expectations for myself and tried to reach them so I could have some breathing room,” Milko said.

Equity Financing

Instead of going into debt, you can agree to sell stock or shares of your business to outside investors. This may be favorable because it lets you avoid taking out loans, but you’ll be giving up partial ownership of your business and in some cases, control over its future.

In the case of both debt and equity financing, you will generally need to bring as much as 50 to 70 percent of the selling price to the table in the form of collateral in order to close the deal since neither banks nor equity investors will want to take on the full risk based solely on your best intentions.

Seller Financing

This is an option where the seller waits a period of time to be paid off in lieu of receiving a lump sum at the closing table. But it comes at a price. Seller financing can add anywhere from five to 25 percent of the asking price because a seller will usually demand higher interest rates than a bank would.

From the buyer’s perspective, there’s a higher level of security in these types of arrangements since the seller will have a stake in the continued profitability of the business since they’ve agreed to delay their payment.

There’s more risk for the seller, and they need to have confidence in the buyer in order to make this arrangement work. In fact, the primary reason sellers shy away from offering terms is their fear that the buyer will end up failing. If the buyer can’t make the payments, the seller would be forced to either take back the business or forfeit the balance of the note.

Seller financing can be worth the risk to the seller even without cash up front. Not only can the seller command a much higher price and get higher interest rates, but offering seller financing greatly increases the chance the business will sell.

There are many ways to structure the sale that makes sense for both buyer and seller. This is an area where a business broker can be of help.

Choosing the best option for your purchase

Regardless of what funding route you choose, getting financing to buy a business requires you to have your financial status organized and secure.

You will often be required to show your:

– Business Plan
– Revenue Projections
– Bank Accounts and Statements, for both yourself and the business you are purchasing
– Asset & Liability Statement, which is a detail of what you own such as the equity in your home and what you owe like credit card debt.
– Valuation, which is evidence of the value of the business you are buying from a professional accountant or valuation expert.

The situation described by these documents — studied along with your personal financial situation — will help you determine which funding option offers the best solution for your unique circumstances. Allowing a business broker, attorney, and accountant to review this information on your behalf can be highly beneficial, especially if you’re not personally an expert in the intricacies of business financing.

Relying on these professionals leaves you free to focus on the part of buying the business you’re truly passionate about, making it your own and making it a success.

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