5 Tips on Financing the Purchase of an Existing Business

Purchasing an Existing Business?

Here are 5 tips to help you finance the acquisition

There are a number of methods you can use when financing the purchase of an existing business. Here are a few that we suggest you try.

Financing the purchase of an existing business

More businesses are being sold than ever before. In fact, a record number of small business owners are selling their companies. According to this data, the number of business listings increased by 8 percent from the prior quarter. 

In a world awash with excess capital and with demand for reliable cash flow returns on the rise, prices for existing businesses & assets have been on the rise.

Popular acquisition targets typically have reliable, recurring revenue and cash flow, with an established brand and loyal customer base. With prices continuing to trend up, you’ll need to have your ducks in a row before you decide on the best way to finance an acquisition.

Read on for a guide to financing the purchase of an existing business. Explore 5 tips for purchasing a business that is highly effective.

1. Apply for an SBA Loan

The United States Small Business Administration (SBA) is a great resource for entrepreneurs. They work with lenders across the nation to guarantee loans against default.

Lenders are willing to take on more financial risk due to the government’s backing. SBA loans offer more favorable terms and rates than conventional funding sources.

There are a number of different loan programs to apply for. The most popular are the 7(a), 504, and microloan programs.

2. Consider Seller Financing

In some deals, the seller is willing to finance a portion or all of the deal. The benefit to the seller is that they can turn a greater profit.

There are also a number of advantages to the buyer. Perhaps most important is the ease of access to capital.

Also, another benefit is the speed of the financing deal. Seller financing is proven to be a faster alternative than conventional loans.

3. Make a Sizable Down Payment

A significant down payment is an effective method for reducing company risk. Like purchasing any asset, a down payment improves your financial position in the company. It reduces the amount of interest that you will pay over the life of the loan.

For business acquisitions, a large down payment is required. While mortgages require 20 percent, a business purchase usually takes even more.

The more cash you bring to the table the better. Many small business owners use personal funds for a down payment. For larger acquisitions, the down payment may require multiple investors pooling their resources together.

4. Angel Investors

There are increasingly common scenarios today where wealthy investors, feeling flush after 10 years of public market gains and looking to diversify into something reliable & attractive going forward, are interested in financing entrepreneurship through acquisition (ETA) as a viable investment vehicle. If you can sell those types of investors on your personal “why” story and your credentials to run a business, this can be a great option if you can get access.

5. Getting Creative

To finalize a business purchase, sometimes you have to get creative. These cases may call for a leveraged buyout or assumption of debt.

In a leveraged buyout, you trade-off existing assets in lieu of capital. An assumption of debt means that you are acquiring the company’s liabilities as well as their assets.

A Recap of Financing the Purchase of an Existing Business

Starting a business from scratch is hard work and risky. Many entrepreneurs choose to purchase an existing business instead and fund their entrepreneurial efforts from the existing cash flows of an operational business.

This option allows an entrepreneur to acquire a proven business model. Entrepreneurs turn to methods like SBA or seller financing to close a deal. If you want to learn more about financing the purchase of an existing business, Login to get matched.

BizNexus -Learn More From Our YouTube Playlist:

BUSINESS ACQUISITION

Have you checked out our podcast?

THE BIZNEXUS ROUNDUP

Quick & dirty interviews, war stories & tips from the trenches of business acquisition, growth & sale. We aim for value, efficiency & fun, so you'll walk away with something useful to take with you along the journey of buying, growing & selling a business.