There still aren’t too many ways to finance the purchase of a business. Here are the primary methods:
Some buyers may have the cash available to purchase the business. Some may elect to use the equity in their residence, or other real estate. Others may have other assets that they can sell or borrow against.
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.
These have become more popular over the years and are now the dominant source of business acquisition financing. There is significant competition among lenders for these loans. We have a long list of banks and we also keep track of the industries each of them will, or will not, loan in. It is always best to work directly with the SBA specialist in each bank.
This category includes family, friends, relatives, credit cards and leasing companies. Some suppliers have been known to assist in the financing of a small business.
At one time this was the dominant method of financing main street business acquisitions. That has all changed with the ready availability of SBA financing. Today, it is generally limited to businesses that don’t meet SBA basic requirements and sometimes banks will ask for 10-15% seller subordinated financing.