Financing a business purchase, or getting cash for a down payment can take many forms. Hopefully the options listed below will give you some ideas where you can find the money to buy a California small business!
Credit Cards - any buyers these days are tapping their credit cards for their down payment to buy a business. The downside of this option is that if you are getting an SBA loan to buy a business, they won’t let you use “a credit card/loan - borrowed money” for the down payment. Other than that this option works for many since there is no waiting for the money or cumbersome approval process.
SBA Loans - Businesses can also be purchased with 7(a) SBA loans. There are conditions however in getting one to buy a business. You still have to put down between 20%-30% depending on the lender, you must have good to excellent credit, and the business has to have PROVABLE cash flow to support the debt service of the loan. The loans are typically 10 years in duration and the loan interest rate tend to be 2-2.75 points above the prime interest rate. Assistance in obtaining an SBA loan is encouraged due to the complexities that can be involved in obtaining one for buying a business.
Home Equity - With home equity not where it once was in California many potential buyers of small businesses are not able to tap this form of financing. If you are able to borrow against your home equity it is a good idea to plan ahead before you get to the offer stage since the approval process can take some time.
Owner Financing - This is the most common form of financing. Usually the buyer will put down 20% - 50% (utilizing one of the methods above), and the owner will carry back a note for a duration of usually two to ten years. Interest rates vary but they usually will be higher than banks or commercial resources. Sometime there will be "combo" financing with the owner taking back a partial note and the rest of the financing will come from the above resources.
Retirement Plans - Many buyers have built up sizeable amounts in their work 401(k) plans. There is a way to tap this money tax free - put it into a "special trust" that then buys the business for you. Many corporate refuges/individuals coming out of corporate America are going this route.
Note Buy Out Firms - There are companies and individuals who buy notes sellers have taken back. Get your possible deal in front of these individuals to see if they would be interested in buying out the note after you have completed the deal - this may sway some sellers who want all cash for their deal and don’t know about this creative financing option!
They key to all this is to be creative - possible tapping several of these sources to get your deal done. With all these resources along with cash in the bank and possible some relatives who may want to invest in your new business - you should have no problems with the financing end of buying a business!
About The Author: Peter Siegel, MBA is the Founder of BizBen.com and the Director of the BizBen Network. A recognized author (3 books and a syndicated small business blog) and expert consultant on selling and buying California small businesses, he provides phone counseling to potential business buyers, business brokers, agents, and small business owners. Peter Siegel can be reached at 925-785-3118.
I am the Founder Of BizBen.com. I consult daily with intermediaries, business buyers, owner/sellers & advisors daily about buying and selling California small to mid-sized businesses. Contact me today about joining & utilizing BizBen, consultations, & advisory services.
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For over 25 years Peter Siegel, MBA has been providing niche business purchase financial advisory and loan placement services with SBA Loans, Non SBA Financing, Retirement Plan Conversions, Note Restructures, etc. Call me regarding business purchase financing and to get pre-qualified: 925-785-3118.
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