Funding Options When Buying a Business
Purchasing an existing business offers a lot of advantages over starting a business from scratch. An existing business is already established and is already generating cash flow and (hopefully) profits. In addition, there is a built-in customer/client base, employees who are already trained and familiar with the operation, and a proven process in place. The one major drawback to buying an established business is the cost.
To purchase a business that is profitable and generating enough cashflow to live on, you will most likely need to come up with at least six figures. For most people, this is a large sum of cash, and they usually do not have this amount already in their savings account. If you fall into this category, you will need to look at various business funding options.
Here are some ways to raise the funds needed to finance a business:
Family and Friends: One of the first places to look is your own circle of influence. Do you know anyone who has the financial capacity and might want to advance you a loan? If you feel like you can work with this person, you may even want to offer a partnership and/or a percentage of the profits in exchange for their investment.
Conventional Bank Loan: If the business you are buying has a strong history of profitability and you have a credit score above 700, you may be able to qualify for a bank loan or SBA loan through the bank. You are likely to get a good interest rate and other favorable terms and conditions from a conventional bank. On the downside, it is difficult to get approved, and many applicants need to look at alternate sources.
Credit Unions: A good potential alternative to a bank is a credit union. Credit unions also typically offer low interest rates, and they tend to take a more personal approach. If you are a member, the credit union will likely look at the specific business model to determine if it makes sense, rather than basing your application solely on the numbers.
Alternate Business Lenders: These days, there are numerous sources online and elsewhere for business loans. Some specialize in specific types of loans (such as startups, commercial real estate, and merchant cash advances), and interest rates can be higher than a bank or credit union. On the positive side, approval rates are much higher as well, and you can often qualify for a loan even if your own personal credit score is not perfect.
Personal Loan: If you happen to have a decent credit score but you do not quite make the cut for a business loan, a personal loan may be another option to look at. There are numerous ways you could go about this. If you qualify, you could get an unsecured line of credit. You could also get a home equity line or credit or finance your business by borrowing against your retirement account.
Seller Financing: In many cases, the seller of the business may be willing to finance at least part of the purchase, especially if he/she already likes you and believes you would be a good fit to take over the business. Sellers may not always advertise their willingness to help finance a purchase, and this may need to become part of the negotiation.
Purchasing an existing business is typically far more expensive than starting one on your own. If you have access to the financing, however, there are several benefits to going this route. If you are considering buying a business, speak to a business intermediary about the process and for a list of available businesses in your area. An experienced business broker can help find a business that is right for you and advise you on how to obtain funding to complete the purchase.