What business financing options are out there for entrepreneurs? You’re ready to sell your business, but how will you find a buyer who can pay for it?
Or are you ready to buy a business? There is a lot of money involved, and costs you might not even think of at first. How will you pay for it all if you don’t have a whole lot of cash?
Fortunately, there are financing options out there for you. Here are some of them, and some tips that might help you determine what options are right for you
Bank Loans
One of the places most of us think of first for going to get a loan is a bank, and that makes sense. Banks are the oldest and most traditional lenders in the country. Banks offer both their business loan programs and also participate in Small Business Administration (SBA) loan programs.
This is the best option if you have a good down payment, reasonable credit, and are buying a well-established business with a good track record of making money. It will also be helpful if you have experience running a business in that industry.
The only downsides are that sometimes the bank takes a long time to approve your loan. If you are looking to move quickly, other options may be better. Also, there is no guarantee that your loan will be approved. Banks are about reducing risk, but they also often have some legacy policies that make it more challenging to get loan approvals.
Credit Union Loans
That last point is where credit union loans often come in. These are essentially non-profit institutions owned by members. While they may have higher credit score requirements and more rules for their membership, they also often have small boards rather than national approval standards and can look at loans in a way that just makes sense.
This means that even if the business you are buying does not fit a more traditional model, but the idea and the business plan make sense, you may get approvals from a credit union where a bank might turn you down.
The other plus side is that generally speaking, credit union interest rates are lower than banks. That can mean big savings with a longer-term loan.
Online Business Loans
This category and the next one are mentioned only because they exist but are both offered with extreme caution. The reason? There are legitimate lenders out there, really online banks who offer the same services as banks without brick and mortar locations.
But there are issues. Because they are online, there are also several scams out there, high-interest loans that come with a great deal of risk, often including hidden balloon payments, incredible predatory interest rates even if you miss a single payment by a single day, and more.
The caution here is to read the terms and conditions carefully. If they don’t closely match those of a more traditional bank loan, walk away. Those high-interest rates can kill any business profits you gain when you purchase a business, creating debilitating financial issues.
Approval rates from online banks can be higher and faster, but be sure you look carefully at any terms and contracts and have your attorney and accountant review anything before you sign.
Online Personal Loans
This category is generally not recommended for a couple of reasons. First, interest rates on personal, unsecured loans tend to be much higher than business loans, and the amount you can borrow is also much lower depending on your income and credit score.
The other issue is that in any business you buy, you want your company, usually an LLC or similar company structure, to take the risks, not you. The purpose of the company structure is to protect you and your assets should the business fail. Taking a personal loan means that win or lose with the business, you owe the debt and must pay it off.
The other reason is that these types of loans also often come with high, nearly predatory interest rates that will quickly burn through any profits your business makes, creating an untenable business situation.
Home Equity Line of Credit (HELOC)
We often hear the success stories of this other type of personal risk. Entrepreneurs put everything they have, risking their fortunes because they believe so deeply in their business and their ideas. It makes for a great story, but as in the above two categories, is almost always a poor decision.
The reason is simple: you are putting your home at risk to purchase a business, which means if the business fails unless you have another source of income, you stand to lose your home as well.
There are exceptions. If you own your home outright and take out a small loan on the value, still keeping plenty of equity in your home, and you structure the loan correctly, it can work. Most of the time, though, business buyers who go for this option are doing so because of a lack of finances and the inability to get it somewhere else. This can be a really poor, and risky way to finance a business purchase.
Seller or Franchisee Financing
This is another of the most common financing methods for a business, and it has some real upsides. If you cannot get all of the money you need to buy a business outright between SBA or other loans, the seller can often carry part of the loan, and if you are purchasing a franchise, the franchisee or parent company will often help with financing.
This has a two-fold advantage. The seller gets to sell the business promptly, and the buyer gets the advantage that the seller has a vested interest in their success. The seller also gets a longer-term form of residual income rather than a lump sum, which has some distinct tax advantages.
Sellers also can offer competitive business rates and even opt for a standard payment plus a share in the profits. A business broker can help you arrange the proper transaction that will have benefits for both the buyer and the seller.
Angel Investors or Private Equity Groups
Angel investors or private equity groups are an option when financing the purchase of a business. There are some advantages, but they do come with certain drawbacks. Typically an angel investor or private equity group is looking to buy into a business at a certain rate, and then leave their money invested for only a relatively short period at which time they want to exit, or essentially be bought out by the owners.
This is a common method of raising money for startups, business owners in high-growth industries that want to sell quickly or develop an exit plan of their own, and those wishing to buy an existing business but who have little capital of their own to work with.
The downside of these types of investors is that you do give up a certain amount of control over the business you buy. If you are a seller, you may be required to stay on for a while to oversee the transition to new management and ownership. If you do not meet the deadline for the exit of the angel investors or private equity group, they may take control of your business unless you can renegotiate terms.
Making Your Business Appealing To A Private Equity Group
Angel investors in Sacramento or private equity groups may be a good option for some of those selling a business or buying one and looking for unique financing options when an infusion of capital is needed to take the business where it needs to go.
Like many decisions when it comes to buying and selling a business, the best practice is to know your options but to contact a professional who can determine the best way to set up a business transaction that benefits both buyers and sellers the most. Those professionals are most often business brokers.
Ready to sell your business and want to know what the best financing options are for your buyer? Ready to buy a business, and need help with making sure the transaction goes just the way it should? Hire a business broker. Contact us here at Rogerson Business Services today and we would be happy to talk to you about how we can best help you.
