As a successful and experienced entrepreneur, you know the importance of securing a financial plan that works for you, and the individuals who you are purchasing from. Before you even develop a rough draft of the business you are interested in acquiring, you should have a clear idea of where your money is going to come from, and how you can best make a sound decision on your financing options.
Modern commercial banks have been hesitant to provide long-term loans to small businesses and entrepreneurs, but by utilizing your skills, and having the right information on sourcing financing, you’ll be able to buy a business with confidence and secure funds.
The following tips offer options for entrepreneurs on how to finance a business purchase, and what you need to know to successfully make a deal.
If you’ve decided to head into a large commercial bank and ask for a loan, be prepared to make a down payment. Some major banks will ask for a down payment of 15 percent to 20 percent of the seller’s listed price before distributing a loan. SBA (Small Business Association) loans may require a down payment, but their loan structure is built to help small businesses and entrepreneurs get a loan, who may have been turned away from traditional banks.
Since traditional banks have been deemed particularly difficult to receive a loan from, seller financing has quickly become one of the best financing games around. By directly obtaining financing from the seller, you can hash out a deal that works for you and the existing owner. Usually, in these cases, a seller is willing to wait for three to five years for an amount to be paid off. Although not all sellers can wait around for payday, many are willing to finance with entrepreneurs directly for an increased rate of lending.
Once you’ve found a business that seems profitable and has the potential to be your next investment as an entrepreneur, being pre-qualified for a loan allows sellers to be confident in your ability to pay the amount agreed to upon a sale. It may be in your best interest to secure funding for an amount higher than the asking price, and to get approval from various sources to display to the bank or lender when asking for a business loan.
Debt financing occurs when you borrow money from an outside source, most usually a bank, to secure the purchase of a business. Agreements usually consist of a directive to repay the loan principal, with an agreed to rate of interest over the time frame of the loan.
Having collateral when trying to obtain financing will help lenders and debt financiers gain an idea of what assets are available, in the case of any contract breaches. Collateral can include:
A business’s accounts receivable, machinery, or inventory.
Equity of your home, or a second – or third – mortgage on your home.
Transworld Business Advisors of Minnesota helps entrepreneurs with expertise and successful business owners acquire the business they’ve always desired by evaluating different business purchase finance options. Visit our listings of available businesses for more information.