For those of you looking to buy a small business, there is good news on the financing front. More lenders and financial institutions are coming back into today's market for business purchase financing. After years of being very selective about what they were financing, I am seeing many financial institutions and companies who are more open to financing deals they would not have in the past few years. For example, many lenders were staying away from awarding larger amounts of financing, say $1 million or more. Today that is changing and business purchase financing for deals priced $1M to $6M is much more common - provided Buyers go to the right contact at the right financial institution!
I am also seeing more non SBA lenders who are financing small to mid-sized business purchases. These tend to be individual investors that pool money, specialty credit unions and small niche financial institutions. As in most improving economies banks and other financial institutions tend to be more receptive and that is exactly what I've been seeing as my clients go secure a business purchase financing. However, just because conditions are improving doesn't mean that securing business purchase financing will be attainable for everyone. Lenders are still being strict about who they are lending to and how much. Despite an improved outlook, lenders still want to make sure their loan gets repaid and for that, you need to be prepared! Before trying to get a loan this year, below are 3 important items you need to know about.
#1 - Learn About Your Other Financing Options - Those Less Common To Buyers
As we've seen in previous years, getting a business purchase loan is no longer a matter of just walking into a lending institution and walking out with an approval for financing to buy a business. Many business buyers have had to get creative in terms of where they secure financing from and that will be no different in the upcoming year. As a business buyer, I suggest you learn more about your options and really evaluate what kind of capital you have access to before you approach a traditional lender for funding. While lenders are lending again, many people have less than perfect credit from the recession and as a result have a difficult time qualifying for traditional financing. Being prepared with alternative funding sources is always a good idea regardless of your credit.
Crowd funding, borrowing from personal retirement funds or "rolling over your a plan" and borrowing from friends and family have all become popular alternatives to traditional financing like SBA and commercial loans, etc. I have also seen other Business Buyers opt to take on short term partners that can help them finance their business transactions but be bought out at later time. Also home values are on the rise so many buyers are using their home equity toward financing a business purchase. Depending on your situation, your home equity may not be enough to finance the entire deal but it could provide a nice down payment. Know your options!
#2 Explore Seller Financing Options - Seller Carry Notes, Buy Out Options
Today, there are a lot of sellers that are willing to extend financing to the right buyer. In fact, many lenders now require that the owner/seller be a part of the financing mix/deal structure. It proves to the financing institution that the business owner/seller truly believes the buyer of their business has what it takes to buy and run the business successfully. To a lender, this ultimately means they will have a much higher chance of getting their money back.
There are a few things you should know about seller financing. One, you will probably pay more for the business. When a seller offers financing options they are taking a risk, so that risk comes with a price tag. Two, you need to be prepared to prove you are capable of running the business. Be prepared to write a mini business plan and to explain why you are going to be successful, the lender may want to see this as well during the underwriting process.
As you can see, there are many options to explore when it comes to securing financing to buy a small to mid-sized business. As a buyer, it's your responsible to learn about each and determine which may be the best fit for your situation and timing. Going to the right financing source is half the battle when it comes to getting approved and funded.
#3 Prepare Early: Get Pre-Qualified, Get Your Financing Team In Place Before Making An Offer
I can't stress this enough. Preparation is critical. Buyers need to get information before they make an offer and get too involved in the sale. I suggest you get professionally pre-approved for financing and work with someone who understands how deals are structured to start you off in the right direction.
Buyers also need to be realistic about what it really means to buy a business. For starters, they need to be realistic about what they can afford. Don't try to buy a business that costs millions of dollars when you have no money to contribute to the sale. Start smaller and work up to that. Next, buyers need to know their limitations when it comes to the business itself. A buyer will be asked about their previous work experience, credit score, current salary if they are working, annual living expenses, outside sources of income, etc. so be prepared to share information in order to complete the transaction.
Lastly, understand that business purchase financing is a specialized form of financing. With that, getting approved really comes down to going to the right person at the right financial institution. Making that type of connection doesn't come without preparation and it typically doesn't come without the support of a specialty advisor in business purchase financing, so choose a good advisor/team to help you through this process.
Cheryl's a restaurant business broker, over 25 years in the bar and restaurant industry coupled with a J.D. Cheryl works tirelessly to create successful strategies and effective negotiations for those who wish to purchase a new or sell an existing bar, restaurant, cafe, or night club. 415-309-2722
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