What You Need to Know About Using Alternative Financing To Buy A Business

Alternative Financing To Buy A Small Business

Throughout the recession, it was very difficult to get approved for business purchase financing and many buyers had to explore alternative means in order to fund their deal.

Some of those methods have remained popular despite the fact that the lending climate is improving.  Now, many business buyers are opting to use alternative funding sources not out of necessity but by choice. 

If you are considering incorporating some alternative funding sources in your next small business acquisition, here is what you need to know to protect yourself and your investment.

Borrowing From Retirement

Using money from your retirement savings can be a great resource for business buyers.  While the average person typically doesn't have enough money in their retirement investments to fund an entire deal, many people use it for a down payment or to bridge the gap between the funding they qualify for through their lending institution and what the actually purchase price of the business will be.

Regardless of how much you plan to borrow, it is important that you take your overall financial situation and your retirement plans into consideration before making any decisions about this revenue source.  I am not a financial adviser so be sure to speak with a professional about the impact of borrowing from your retirement.  Keep in mind that borrowing from your retirement may have tax consequences.  It may also force you to postpone when you'll be able to retire.  There is also the possibility you will not be able to repay the money borrowed so be sure you investigate this option thoroughly to protect yourself and your retirement plans.

Borrowing Against Your Home

Also with the improvement of the economy, home values are on the rise again.  With that, many business buyers are finding they have access to capital right under their own roof literally.  Many business buyers opt to leverage the equity in their homes to fund a business purchase.  Again, depending on your individual situation, there may not be enough equity to fund an entire deal but you may have enough to bridge a funding gap or provide a down payment.

When it comes to this option, it is really important that you have your spouse's buy-in to borrow against your home.  The reality of doing this is that if the business does not work out, your home may be on the line.  With that, it is really important that in order to protect yourself and your family, you thoroughly understand what will happen in the event that you cannot repay the loan.

Borrowing From Friends And Family

Many people believe you should never mix friends, family and money.  In my opinion, asking a friend or family member for money to fund the purchase of a business is ok but only if you approach the deal as you would with any other investor.  Even though they are a personal acquaintance you should still treat them as you would any other business contact.

I suggest drawing up a formal agreement.  Get your Attorney involved and be sure to detail payment terms.  Also, talk openly with your investor about what will happen if you cannot repay the loan.  If you come to an understanding up front of what will happen under those circumstances there may be less chance of there being hard feelings over a failed business transaction.

Seller Financing

Many business owners are offering financing as a part of their sales agreement.  If the owner of the business you are considering is not including it as a part of your deal don't be afraid to negotiate with them for it.  There are some owners that are willing to offer as much as 100% financing for the right buyer so if you find yourself in a situation where you cannot get money from a traditional lender; it is not unheard of to turn to the owner for financing.

Keep in mind that owner financing will most likely come at a premium.  Because the owner is essentially acting as a lending institution and taking a risk on whether or not you'll repay them, they will probably charge a premium interest rate.  To protect yourself, have your Attorney and your Business Broker review the agreement to make sure the terms are fair.

Partners Or Angel Investors

Taking on a partner or finding an angel investor are two other forms of alternative financing to explore.  Each comes with pros and cons.  Partners and angel investors can not only provide the capital you need to fund your deal but in some cases they can also provide guidance to help you run the business.

Again, like when working with friends and family, I suggest you have a formal agreement drawn up by your Attorney.  Be very clear with what each party's role will be in the business and clearly detail what the repayment terms are.  Also discuss what will happen if you cannot repay the loan and include that in your agreement.

Peter Siegel, MBAAbout The Author: Peter Siegel, MBA is the Founder & Advisor (ProBuy & ProSell Programs) at BizBen.com and BizBenNetwork. He works with potential business buyers, business sellers, brokers, agents, investors, & advisors. Reach him direct at 925-785-3118 to discuss strategies regarding buying, selling, (or financing a puchase of) small to mid-sized businesses.

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business

  Helpful Resources To Assist In Selling And Buying California Businesses
Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

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