When buyers come to Transworld - Rocky Mountain interested in purchasing a business, they often have questions on the options for financing their acquisition. There are quite a few ways to finance the purchase of a business and buyers may even choose to use multiple forms of financing within one transaction. The most common ways in which we see business buyers finance their purchase are cash, bank financing, seller financing, or investors and we have described these options below.
Cash. Some business buyers are fortunate enough to have a sufficient amount of money saved to purchase their business acquisition. But don’t worry, if this is not the situation you’re in, than there are other ways to finance the purchase of a business. However, typically buyers will need some amount of a cash down payment in addition to their outside financing.
Bank Financing. Under the bank financing umbrella, there is the conventional loan and the SBA loan. A conventional loan is the typical type of loan you would receive from a bank. This method of financing for purchasing a business is fairly rare today, especially given the existence of the SBA loan.
An SBA loan is a bank loan that is guaranteed by the Small Business Administration and instituted by banking institutions. Each bank will have their own standards and requirements for this type of loan, however, there are lenders that are considered SBA preferred and have been pre-approved by the SBA. SBA loans require an equity injection of at least 10%, which cannot be financed through a seller note (unless put on standby for the duration of the SBA loan). The bank will also typically look at the financial performance of the business, cash flow requirements, the buyer’s credit score, industry experience, collateral, and their business plan.
Seller Financing. This type of financing is similar to a bank loan, but is given by the seller of the business being acquired. In our experience, the seller typically requires a 50% down payment. However, the down payment is always negotiable. Also, these types of loans will often have a slightly higher interest rate than you would see with a bank loan, usually around 5% to 8%. The term of the loan depends on the dollar value. Smaller loans may have a term no more than a year, while larger loans could have a 5 year term.
Investors. We don’t see investor loans for small business acquisitions as much as we do a mixture of cash, bank loans, or seller financing, but they are not totally uncommon. An investor loan would require a private agreement between each of the parties involved and they can come from friends, family, or other private investors. We highly suggest these agreements are set in place prior to finding a business for purchase.
If you are interested in acquiring a business or would like a referral to a quality finance professional visit our website or schedule a complimentary consultation today!*
Rachael Holstein has been the Marketing Manager for Transworld - Rocky Mountain since 2016. Her working experience has largely focused on business development and marketing in the finance, architecture, property management, and information technology industries. A long time resident of Cleveland, Ohio, she attained her undergrad from John Carroll University and her Master’s Degree in Global Interactions from Cleveland State University. In 2013, she relocated to Denver with her husband, Joe, and her furry companions to explore the mile high life!
*Transworld Business Advisors - Rocky Mountain is not a banking, financing, or investment firm and this should not be considered financial advice. Please consult a finance professional for all of your business acquisition financing needs. For professional recommendations please visit our Recommended Partners page.