When purchasing a business you will either need the full amount of cash in hand or place a down payment and finance the balance. There are different financing options available.
Friends and family – Depending on your situation this can be an excellent source funds. Offering a return on investment or possibly a share of the business may encourage friends and family to invest in your idea.
Crowd Funding – This is a relatively new type of financing that has become very popular.Depending on the concept and type of business this option may be of interest. There are high net worth individuals and risk takers who might see something in your business that they find attractive. You would need to offer an incentive and return on investment to attract this type of investor.
Bank Loan or credit union – Local banks and credit unions offer loans for small businesses and entrepreneurs. These loans are based on the credit-worthiness and financials of the buyer as well as those of the seller. Banks will typically require that the business provide several years of tax returns, current and historical financials and an appraisal or review of the business before underwriting these loans. The buyer will also need to provide their personal financials, business plan and resume.
Seller Financing – Is sometimes offered when bank financing is not attainable or when the buyer is unable to come up with the full purchase price of the business. There are a variety of reasons why a new buyer is unable to obtain bank financing. With this option a down payment will usually be made based upon an agreement between the buyer and seller. The buyer will then make payments (usually principal and interest) for a set amount of time. Typically one or more balloon payments will be made throughout the terms of the agreement. Seller financing can also benefit the seller if they are nearing retirement or do not need a lump sum of money right away. The total tax burden realized from the sale can be deferred. Offering seller financing can also help you achieve a higher sales price and a quicker closing. The seller may also receive a higher interest rate than they would from other investments in the open market and they are already familiar with income of the business.
Franchise Funding – Is available for the initial or refinancing of franchises. Funding is available to offset start up expenses, acquisitions, real estate, leasehold improvements, debt restructuring or partnership buyout. Many of these lenders are already familiar with the specific Franchisor. This will eliminate or lessen the time spent explaining the concept in order to get a loan approved.
Master Lease (NNN) Purchase Option Contract – There are certain circumstances where a business is not operating at an optimal level or is even losing money. Financials may not be in order and the infrastructure is failing. In these cases a master lease or NNN lease purchase option might be considered. In this case the potential buyer agrees to lease the business for a certain number of years with the option to purchase the business at a future date. The owner is relieved of the day to day operations, capital improvements and management. The seller (owner) receives a check each month as a lease payment for the business.
Small Business Administration (SBA)– Is a government agency that guarantees loans to small businesses and entrepreneurs. The government encourages small business ownership and might be able to assist you with an SBA loan. These loans are guaranteed by the agency and are offered by lenders with flexible terms and low rates. However, the process to obtain an SBA loan is rigorous and time consuming. There are many requirements and unfortunately some businesses are not eligible. Many owners may not want to tie up their business and go through the due diligence process with a buyer only to find out the sale is dependent upon a loan from SBA. Businesses with organized and proven financials maybe able to pre-qualify for and SBA loan. This will benefit the seller and potential buyer. Our firm has a webpage dedicated to SBA. http://www.mhpbiz.com/sba-small-bus-admin/
As you can see there are many options to assist in financing and starting your business. Please contact Suncoast Business Consultants if you are interested in business ownership. We can assist you in the process and refer you to qualified lenders and/or advisers when necessary. Email, firstname.lastname@example.org call 305.301.2443 or fax to 305.847.0395