So, you have decided to leave corporate America and purchase your own business. After months of research, you have found a great business for sale that suits your skills and passion. Now…how are you going to pay for it?
One of the biggest challenges for entrepreneurs who want to purchase an existing business is coming up with the money to pay the Seller’s asking (or negotiated) price.
Here are some options to consider:
1. Cash– As we all know, cash is king. If you are fortunate enough to have saved enough money to purchase a business without having to obtain a loan, then you are in good shape–and, you will be making the Seller very happy;
2. Financing from a traditional bank-If your balance sheet and credit are very strong, you may be a candidate to obtain financing from a traditional bank. Beware…many traditional banks will not finance certain types of industries such as bars/restaurants–especially if you have no prior operating experience;
3. Seller Financing– Some sellers are willing to finance a portion of the purchase price. In these situations, it is typical for the Buyer to sign a Note and pay back the Seller over a period of time with interest. The Seller will also want some additional security for the loan. Be prepared to come up with at least 50% of the sale price (and sometimes more) to be paid to Seller at closing.
4. Private Lenders– There are many third-party private lending groups that lend “hard money”. Typically, these loans involve high interest rates and fees. In many cases, borrowing hard money is not the ideal situation for a buyer, but it may be the only option available.
5. Community Banks– There are several community and local banks that are aggressively seeking to lend–and, will often times provide financing in situations from which traditional banks tend to shy away.
6. SBA Financing– There are government backed SBA programs (Small Business Administration) that are offered through many banks. SBA loans can offer opportunities to less experienced owner/operators who also have limited cash to buy a business.