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Buying a Business: Financing Options

When purchasing a business for “all cash” is not possible, sometimes there are other options buyers can consider.

Making An Offer

When you’ve found the perfect business it’s time to make an offer. Offers are typically structured with the buyer providing a certain amount down and financing the remainder. The remaining amount due is financed in one of three ways: by the seller, through a bank, or with help from personal resources.

Obviously sellers prefer to get all cash at closing, but buyers can purchase a larger or more expensive business if they are willing and able to finance a portion of it. Low or no-money down offers are exceedingly rare. First of all, it’s very hard for the owner to make any income when they have high debt payments. Secondly, banks and lenders are reluctant to provide funds for a business that the buyer doesn’t show a vested financial interest in. A down payment will lower the amount of debt financed and make you a more attractive borrower in the eyes of the lender.

Financing Options

Business owners have a few different ways of paying for their new business. Which one is right for you will depend on your financial situation, the sales price of the business, and how willing the seller is to work with you.

  • Seller Financed. Seller financing is not as uncommon as you’d think. In addition to being the least expensive, it is also the easiest type of financing to obtain. Under this option, the buyer provides the seller with a percentage of the sale price upfront. The seller takes the remainder in the form of a promissory note, which the buyer pays back with interest. Interest rates are often lower than a bank’s rates, but the payback term can be shorter too. 3-5 years is typical. If you can find a seller who is willing to finance you, take that as a good sign that if you purchase the business and run into issues or need some short-term guidance that they will come back and help you. The sellers are interested in making sure the business is successful so that the Buyer can finish paying off their note. It means the seller has high confidence in the success of the business, even after he or she hands over the reins.
  • Lender Financed. Lender financing, or debt financing, is a typical bank loan. You will provide some amount of money down and the bank or lending institution will finance the rest at a certain interest rate and for a certain period of time. Business loans are not like home loans, though, so don’t expect to find lenders willing to provide a long-term loan. The lender will want proof that the business is viable so you’ll need to provide an earnings history in addition to your down payment. Many bank loans are guaranteed by the Small Business Administration to encourage lending.
  • Personal Financing. Another form of debt financing is to obtain loans from friends, family, acquaintances, or peer-to-peer lending networks. You would work out the terms of the loan (amount loaned, payback period, whether or not interest will be charged, etc.) on your own for each debt taken on. If you go this route, make sure you can uphold your end of the deal and that your financier can afford to loan you the money. That will ease any stress that may arise from personal financing.
  • Other Options. There is always the option to cash in any retirement accounts or sell any equity shares you will have in the business as a way to finance it. Factoring companies are another option. These companies will upfront you cash for the amount of accounts receivables that are outstanding. You may not be able to do this to buy a business, but you can do it afterwards as a way to gain cash.

Learn More About Buying A Business And Your Finance Options From Crowne Atlantic Properties

Financing a business will be different for everyone. So much of it depends on the business for sale, the seller’s interests, and the buyer’s capabilities. For help finding the right business to buy in Florida, contact Crowne Atlantic Properties at 407-478-4101. We can help you with all steps of the business buying process from sourcing a business, negotiating the sale, and identifying finance options.