How to Finance a Business with Little Cash Out of Pocket

Many people dream of the day when they can own their own business and no longer have the burden of answering to a demanding or apathetic boss, and instead have the freedom to be creative in their pursuits. However, few pursue the act of procuring an existing business because they do not believe that they have adequate capital to purchase one. Buying a business has its benefits because the business is already well-established and includes a full inventory and a consistent cash flow.

While it may be more difficult for business buyers to collect bank loans than in previous years, due to a cautious economy, that does not indicate that a large sum of money out of pocket is required to buy a business. In fact, a handful of buyers have bought a business without using any cash of their own. The following guide discusses other routes of funding for a small business acquisition.

1. Contact the Small Business Association

The Small Business Association (SBA) is a great resource to utilize when it comes to buying or selling a business. This association was created solely for the purpose of supporting the evolution of small businesses across the nation. While the SBA does not give out SBA loans to someone looking to buy a business, they will guarantee loans provided by an approved lender. This type of loan is called a 7(a) loan, and can be used for up to $1.3 million in capital (or more if real estate is involved).

An SBA guaranteed loan will most likely take longer to process than a regular bank loan, due to the vast amounts of the documentation and details required to apply. However, this is a good route for buyers to take if other banks have turned them down, and SBA interest rates are highly competitive.

2. Consider Seller Financing

Seller financing occurs when the seller agrees to fund a portion of the purchase price by agreeing to wait to obtain a portion of the capital until after certain stipulations have been met. It is estimated that at least 80% of business purchases have been funded at least in some part by seller financing, and in most cases equaled at least 50% of the full purchase price.

The benefit of seller financing is that it eases the minds of both the buyer and the seller. Seller financing generates greater trust between parties because the seller is able to monetarily illustrate his or her confidence in the performance of the business and therefore lowers the risk for the buyer, while the seller has the chance to earn a greater return should the business continue to be successful after the close. One reason that many buyers prefer seller financing is that rather than having to pay out of pocket, they can use the capital gained by the acquired business to reimburse the seller.

Offering a high interest rate will further encourage the seller to agree to finance a portion of the acquisition. Another way to make the idea of seller financing more appealing to the seller would be to offer to retain the seller as an employee for a few months to a year until the transference of ownership has been seamlessly achieved. During this course of time, the seller will not only continue to get paid but it will benefit the buyer in easing the transition.

3. Have Good Personal Finances

While a buyer may not have enough money to purchase a business on their own, it is still important to have a good credit standing, as this will affect the ability to obtain a loan. It is quite possible that a bank or SBA loan will be inaccessible unless personal assets are placed as collateral. Most often, a business buyer will use their home as collateral. Know that buying a small business is not a small decision, even if the money does not come from one’s own pocket. It is a process that must be heavily deliberated.

4. Ensure that the Business Is Stable

Since seller financing does not eliminate all risk, proper considerations must be made before embarking upon the business acquisition process. Ensuring that the business in question is in good health is one way to lower the risk for the buyer. While the due diligence process will reveal a lot about the company’s, this process is so time consuming that determining the condition of the business before then is important. A good business broker will be more interested in finding the most appropriate seller rather than simply matching any two buyers and sellers together in order to complete a transaction.

5. Hire a Broker

Hiring a business broker is one way to certify that the company will be an appropriate fit for the buyer. Business brokers have exclusive access to lists of businesses for sale, and can facilitate communications so that the amount of risk involved may be determined before the process begins.

A business broker will also have advice and resources with which to benefit to the buyer. By appraising the business in question, the broker will be able to determine a reasonable asking price for the acquisition. They will also be able to assist the buyer in finding the right type of financing for their specific situation. Since a business broker is well-versed in the process of buying and selling businesses, they will know the best funding methods and will have the negotiation skills to encourage the seller to comply.

As you can see, buying a business with little money out of pocket may be more feasible than one may believe. If hiring a business broker seems to be the next logical step towards owning the business of your dreams, or if you would like to know more about why you should hire a business broker, please contact us at George & Company. We would be happy to help you become the new owner of a successful company.