Financing a Business

There still aren't too many ways to finance the purchase of a business. Here are the primary methods:

Buyer Financing

Some buyers may have the cash available to purchase the business. Some may elect to use equity in their residence or other real estate. Others may have other assets that they can sell or borrow against.

Bank Financing

Banks may lend against a buyer's assets as described above. They may also lend against the assets of the business, assuming there is sufficient value to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by business owners have very little relationship to the actual earning power of the business.

Venture Capital Firms

These firms do not, as a practice, lend to small or even many mid-size businesses unless tremendous growth is anticipated. They also usually expect an equity position in the company.

SBA Loans

What is the SBA? The SBA is the United States Small Business Administration that has been in existence since the 1950's. The 7a SBA program allows customers to obtain financing for a variety of reasons which includes business acquisition financing. This financing allows banks to offer more favorable terms than are normally available. In fact, some banks offer terms of up to 10 years with no balloon payment and no prepayment penalties on these business acquisitions. In addition, business acquisitions that include the commercial real estate can be financed for longer fully amortizing terms.

SBA have become more popular. There is now some competition among lenders for these loans. Many banks offer them, but the preferred SBA lenders seem to have the upper-hand in both acceptance and service.

Other Sources

This category includes family, friends. credit cards, and leasing companies. Some suppliers have been known to assist in the financing of a small business.

Seller Financing

This is, by far, the largest source of financing available for the purchase of a business. Many industry experts say about 90 percent of small businesses sell with, or perhaps, because of, the seller financing a good portion of the sale price. Buyers have much more confidence in the decision to purchase a business when the seller is willing to assist in the financing. The buyer has confidence that the seller believes that the business will service the debt, in addition to providing a living wage.