You’ve always dreamt of being your own boss. You’ve spent nights crafting business plans and plotting your success. But, let’s get real—the thought of starting from ground zero is nothing short of terrifying! What if you could step into an existing business, one with a proven track record and a loyal customer base? Buying an established business could be an easier way to help you realize your dream of owning a small business. Sound appealing? The next question is how to finance it.
Here are some of the most common options to finance a small business purchase.
Business loans
One of the most common ways to finance a small business purchase is through business acquisition loans. You can obtain these loans from various sources, such as the Small Business Administration (SBA), traditional banks, credit unions, or online lenders.
SBA loans—including the popular 7(a) loans, 504 loans, and microloans—offer attractive terms for business acquisition but require meeting eligibility requirements (such as good personal credit or a minimum credit score) and providing extensive financial documentation. Conventional and online lenders also assess the financial documents of the existing business and may require collateral and personal guarantees.
What you need to know: Traditional bank loans often require a downpayment of 20% to 25% on acquisition loans, coupled with good personal credit and substantial assets.
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Personal funds or family assistance
If you’ve been diligently saving or have access to personal funds (like a 401(k)), you might consider using these resources for your business purchase or as a downpayment for other financing options. With a 401(k), you can either withdraw funds, take out a loan against your balance, or transfer your balance into a ROBS (rollovers as business startups) account.
Another alternative is asking for loans or investments from friends and family. However, it’s crucial to assess risks and seek professional advice to navigate these avenues effectively.
Seller financing
Seller financing presents another avenue for financing a small business purchase that is similar to a business acquisition loan. This arrangement involves the seller providing a loan to the buyer (with interest), typically covering a portion of the total purchase price—typically between 5% and 60% of the total asking price, according to Guidant Financial. Terms and conditions vary, but seller financing often requires a substantial down payment and may involve additional collateral or personal guarantees.
Private equity or venture capital
Private equity or venture capital funding could be an option for those eyeing ambitious acquisitions. Investors provide capital in exchange for ownership stakes and sometimes play an active role in business operations. However, be prepared to relinquish some control and involve investors in strategic decision-making processes.
Alternative financing options
Apart from traditional loans and equity investments, there are other innovative financing solutions worth exploring. Crowdfunding platforms offer opportunities to raise capital from a diverse pool of investors, while grants and government programs provide non-repayable funds to support small business initiatives. However, securing these alternative funding sources often requires a compelling business proposition and strategic marketing effort.
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Navigating the loan application process
Applying for a business acquisition loan can be a complex process. Regardless of the financing option you choose, certain qualifications and considerations remain consistent. Lenders scrutinize personal credit history, industry experience, and the financial health of the business you want to acquire. Preparation is key—you’ll need to gather extensive documentation, create a solid business plan, and seek professional guidance from accountants and attorneys.
Here are some tips to help you secure the right financing solution:
- Start by assessing your eligibility and gathering the necessary documents, including personal financial statements, business plans, and financial projections
- Work with the current owner to get business valuation details and financial statements
- Research lenders to find the best fit for your financing needs, considering factors such as interest rates, repayment terms, and eligibility criteria
- Be prepared to answer questions about the business you plan to acquire, including its financial performance, market position, and growth potential
- Submit your application and follow up with lenders as needed to ensure a timely and successful outcome
Get professional assistance
At Financial Solution Advisors, we understand the complexities of small business financing. From navigating loan applications to optimizing financial structures, we’re here to support your entrepreneurial journey every step of the way. Contact us today to schedule a consultation.