There is a common misconception that you need to be “rich” or “well-off” in order to purchase a business. While it certainly helps to have a strong financial foundation, there are a multitude of financing options available to a budding entrepreneur to help them achieve their goals. We’ll discuss 4 different financing options that you can use to start or buy your dream business.
SBA 7(a) Loan
It shouldn’t be a surprise that bank financing is at the top of our list. The Small Business Administration (or SBA) is a federal agency that provides support, capital, and counselling to small businesses across the United States. They are usually the lender best suited for small business loans. The 7(a) loan is designed specifically to help entrepreneurs start or buy a business. If your credit score is strong and you have experience in the field you are getting into, there is a chance that you will only need to make a down payment of as little as 10-20% of the purchase price of the business depending on the transaction. The fees built into the loan are expensive, but this is a very good option available to strong borrowers with business experience and experience in their new field. This loan is available to those looking to buy a business as well as business owners in need of more capital.
SBA 504 Loan
The 504 Loan is another SBA financing option. The purpose of this loan is to allow the borrower to purchase hard assets, such as equipment or real estate. This makes it a versatile loan that can be helpful to an expanding business owner, an owner short on capital or a business purchaser that needs to give their new business a boost. If you are going the SBA route, a 7(a) loan is the more likely option.
Seller Financing
This is a financing option that we always recommend our buyers take advantage of if it’s available. There is no lengthy loan processing period or extra fees built into the loan. Typically, a seller will require the loan to be paid back with interest, just as any other loan. So, you will make a down payment on the business and pay the remainder of the purchase price to the seller over time. The best advantage of obtaining seller financing is that the seller will have a vested interest in your success, in most cases. Firstly, it’s reassuring if seller financing is being offered because this means that the seller is so confident in their business, they believe that as long as a buyer is qualified, they will succeed. They are essentially betting money on it. If you have any hiccups with the business, a seller may be willing to help out because now their money is on the line. Oftentimes, a savvy buyer or business broker can negotiate some seller financing even if the seller isn’t offering it. Read our article on how to make sure you are protected in a transaction for more information on seller financing!
Friends and Family
Borrowing money from friends and family can be tricky. It may be the least risky option for you. Friends and family may not think so. However, they can be a good source of financing especially if you don’t have the credit or capital to borrow from a bank. If their investment pays off, it can be rewarding to them financially and may benefit your personal relationship. However, if the investment doesn’t pay off, it could cost them financially and may damage your relationship.
Conclusion
These are all fine options for financing to help you buy or start your dream business. As business transactions get into the higher price ranges, there will rarely be a buyer that doesn’t obtain at least a little financing. In many cases with start-up businesses, less financing will be required. You can also read more about starting a business vs buying one. However, the big takeaway should be that you do not have to be wealthy in order to embark on your journey of entrepreneurship. If you are interested in buying, selling, or finding space to start your business, contact us today!
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