If you’re looking to buy an already-operating business, finding financing is the #1 barrier to achieving this goal.
Thankfully, there are many ways to secure funding for any business you’re looking to buy, or any project you may be looking at starting.
Private capital includes individuals or firms that have raised money to buy businesses. These investors see legacy businesses as good investments, and will either buy a portion or all of the business to help the owners expand or the staff to continue operating the business.
SuccessionMatching has 52 professional buyers on our site, with $500,000,000 to deploy on small businesses.
Traditional Lending Options
Often when people are looking for a loan, their first thought is through a bank or credit union. Banks will look for 20-40% equity when considering who to loan to, which means your buyer could potentially leverage 60-80% of the purchase price.
However, COVID-19 has changed the playing field a bit. Greater uncertainty in the economy has made banks more hesitant to lend money because businesses can’t use their historical financial statements to prove they can repay their loans and they are over exposed in the commercial real estate space.
It is good to note that banks don’t lend on a business’ goodwill, which could impact the asking price and the structure of the deal.
Banks have also increased interest rates on loans, which makes traditional lending options less competitive with other options than they were before.
Non-Traditional Lending Options
Non-traditional lending options would include government funds, such as Community Futures, Farm Credit Canada, and the Small Business Administration (SBA).
While these lending options can have higher interest rates, they are usually willing to take greater risks when lending money as it often helps keep local businesses in the community.
Non-traditional lending options can also have some flexibility in repayment plans. For example, seasonal businesses can make larger payments during their busy months, then make smaller payments (or interest-only payments) during their quieter months.
Vendor financing (also called seller financing) can be another option for business owners that are looking to sell their business. While this option can be financially riskier, it can be a good option for certain businesses.
A good example of how vendor financing works would be in combination with traditional financing. Perhaps your staff wants to buy your business from you, but doesn’t have the capital to put up equity for the bank to lend to them. You may decide that it is worth the risk to sell your business to them over a period of time. You keep 30 percent of the shares as equity, then they are able to borrow the remaining funds from a bank to buy out the first 70 percent. Once the bank loan is repaid then they would pay for the remaining 30 percent out of cash-flow.
While these lending options all have pros and cons, it is important that business owners always have a fleshed out business plan when looking for financing.
If you’re interested in learning more about any of these lending options, or are interested in being connected to our professional buyers, reach out to firstname.lastname@example.org.