Financing Options

A variety of sources can help you finance the purchase finance of your business. With the loosening of the Small Business Administration’s (SBA) requirements, more banks recognize that Main Street businesses are a good investment. Consequently, many institutions have begun to make capital available for this purpose.

We have also witnessed more and more buyers leverage their 401K plans to acquire a business. This option is presented in more detail on Using Your 401(K) to Buy a Business.

Banks and Other Lending Institutions
While some capital and a good credit score are prerequisites, many banks give higher priority to the businesses’ historical record of revenue generation and debt accumulation. Of course, your ability to run the business  – based on your skills, business plan and credit history – do come into play.

Small Business Loans Backed by the SBA
This government agency’s mission is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.

SBA loans are made through banks, credit unions and other lenders who partner with the SBA. The SBA guarantees part of the loan. Your lending institution and advisor can help guide you through the process.

Seller Financing
Seller financing is when the owner of a small businesses allows the buyer to pay some of the purchase price of the business in the form of a promissory note. Sellers often offer financing to strengthen their position for a quick sell.

We can provide you with a template to structures such deals, but have your legal and financial advisors review and modify it to ensure your interests are protected.

Non-Traditional Lenders
If family members are in a position to help, they are investing in your future and their own. These deals are sometimes structured so that the lending individual receives a percentage of the annual cash flow or gross income. Other deals specify a rate and term. Family dynamics can come into play so have your professional advisors craft a solid agreement that allows both parties to know what to expect and clearly explains their obligations.

Alternative Non-Bank lenders have also come into the market place to fill the gap for borrowers whose credit histories make it difficult to secure loans through the traditional banks. These lenders recognize that credit scores are not the only indicator of loan repayment. The terms of the loans tend to be shorter and the rates higher. Discuss with your financial advisor if this is a viable option for you.

Business Loan Checklist

While the requirements vary between institutions and lenders, frequently you’ll be asked to provide the following items. You can also access a print version of this form at SGA’s Business Loan Checklist.

• Loan Application
  • Why are you applying for the loan
  • How will the loan proceeds be used
  • What additional assets might you need to purchase
  • Who are the members of your management team
• Resume: Some lenders require evidence of managerial or business experience.
• A Business Plan: This will include Profit & Loss (P&L) statements, cash flow and balance sheets. The current owner will provide these documents.
• Credit Report
• Collateral: Collateral requirements vary, but strong business plans and financial statements can lessen this requirement.
• Legal Documents:  These documents may include any required licenses, franchise agreements, commercial leases and Articles of Incorporation.