Different Ways to Finance the Acquisition of An Existing Business
So, you’re in the market to purchase an existing business. You have the business education, training, and experience. The only thing missing is the financing.
Don’t worry. We’re going to show you two ways you can finance the business of your dreams.
1. Use Cash Flow to Purchase a Business
As might be expected, cash solves a lot of problems. If you had pockets that were deep enough, you could take control of the existing business without any loans to worry about.
A more feasible option for most people is to use cash to partially pay the asking price and receive a loan for the remainder. Then use the cash flow from your new business to meet the loan’s payment schedule. You’re essentially using the business to pay for the business.
This approach requires a careful beforehand analysis of the cash flow the current owner is enjoying. Is it verifiable? How much of the current cash flow will be available for repaying the loan?
Imagine that the business under the current owner has a monthly cash flow of $40,000. You project that under your ownership, the cash flow will be about the same. Of the $40,000, you think that you could allocate approximately 10% to your debt reduction.
That means that you would have $4,000 available each month to repay the loan. If you could negotiate a purchase that works with your estimation, you would be able to purchase the business.
2. Use Seller Financing to Purchase a Business
Seller financing means that you won’t have to deal with a traditional loan institution when buying a business. Instead, the seller agrees to structure a loan agreement with you. The arrangement is similar to some used car lots whose selling point is “buy here, pay here.”
A seller may be more lenient regarding your qualifications than a traditional bank. However, that doesn’t mean that sellers aren’t going to protect their property. They will still require that you submit the standard financial background information that indicates that you can repay the loan.
Like other loaners, the seller will structure a loan with an interest rate guaranteed to produce a profit. The interest rate can vary from significantly lower to notably higher than the one you might receive from a bank. It depends on the seller, the amount of the loan, and your financial track record.
You will also have to make your payments on time just as you would to a bank. And as with a traditional lender, the loan agreement will include penalties should you make your payments late or default on the loan.
Sellers expect to receive payments on schedule, but they also want to see your business succeed. They’d prefer to collect your regular payments than regain ownership of their old enterprise.
So, they might be a bit more patient than a bank if you’re a little late with your payments. They may also willingly offer advice to help you clear the hurdles associated with running their former business.
Acquire An Existing Business Today
There’s no reason that you need to go another year without being an entrepreneur. If you genuinely want to purchase an existing business with a healthy cash flow, contact us today. We’ll match your interests with a compatible business along with the right broker to facilitate your transition to business owner.