Financing the Purchase of a Small Business

If only I was paid a dime for every buyer that has came to me thinking they can finance a business with no money down. The truth is and this has absolutely nothing to do with the current financial crisis. You cannot finance a business with no money down. Now before the emails start filling my mailbox up with exceptions please let me explain myself.

Financing a small business requires one of these 2 options: A down payment from the buyer and seller financing for the balance, or a 100% purchase by the buyer with no seller financing. Let’s discuss them in more detail.

Down Payment & Seller Financing:

No seller in their right mind will sell a business without some form of down payment. The buyer must have an equity investment into the business for the seller to feel comfortable financing the balance and more importantly turning the business over to a new owner. Without this equity, the buyer has no exposure and could simply walk away at any time.

The typical down payment on a small business with seller financing will completely vary from deal to deal. The motivation of the seller will play a huge roll in this equation. One seller may accept 20%, another can be as high as 80%. Typically sellers would like to see the down payment close to 50%.

Terms of the Seller Financing Note:

Negotiate with the seller financing so that you are 100% comfortable in being able to cover the debt service out off the income from the business. A good place to start would be to look at a seller note amortized over 5 years (60 months) at 6 or 7% interest. (Use a mortgage calculator or auto calculator at Bankrate.com to calculate the payment) On larger transactions, the financing can spread over possibly 10 years with a balloon payment due in 5 years. A balloon payment means you will be required to pay the balance off on the last payment.

So now that we know a down payment will be required, where and how do we get the money? There are several sources from personal savings, family, friends, private investors, and banks.

Bank financing the down payment or 100% of the Purchase:

If you decide to use a bank for your financing method on the down payment there are a couple key facts to understand. Today banks are requiring buyers to put down a minimum of 15 – 20% down payment. This is money you must come up with to get the loan. In addition, you will need to have experience in the industry or least management experience and a good credit score to even qualify for the loan. Yes, that’s right. You will need to have a good credit score. Next, they will take a very close look at 3 years financial history on the business. If the business does not have strong financial tax records then you need to be considering a personal loan from the bank because a business loan is out of the question.

Personal Loan:

If you have good credit you may be able to qualify for a personal loan from the bank to use as the down payment or purchase. You may have a home you can refinance, a CD to borrow against, or another asset that can help secure the loan.

The Common Misconception from Bankers:

It is very common for bankers that do not specialize in SBA loans to unfortunately mislead buyers into believing they can easily give them a loan. It is not the bankers fault in this; they are just trying to bring in new business to the bank. The truth is very few bankers know anything about buying or financing a business. In my opinion, they just bring the new application in, process the loan and it’s the team of underwriters behind the scene that are the decision makers and who have the restrictions set in place. The best way to find a qualified SBA loan broker is to contact your local Business Broker and ask for their opinion. Business Brokers are an excellent resource for financing.

3 Bank Qualifications Needed for a Small Business Loan:

1. Experience
2. Cash Down Payment 15%-20%
3. 3 years profitable financial history on the business

Negotiate and Make the Deal Work:

Now that you understand the financing structure required to buy a business, contact a local business broker and search for a business for sale that fits your requirements. Once you find that perfect business, have the broker negotiate the financing terms for you with the owner. Remember the Broker has every incentive to get the deal done and they will go to great lengths to make the pricing and terms work.

Have You Overlooked Business Financing of Receivables Or Factoring As a Working Capital Strategy?

Have you forgotten something? Perhaps it is just a case of overlooking or not knowing all your alternatives in business financing for working capital. Factoring receivables for cash flow is just one of those strategies that you may have missed, not heard about, or not fully understood or investigated.

Let’s do a basic ‘ primer’ on this somewhat unknown or mis-understood form of business financing. Many Canadian business owners or financial managers mistake factoring or the selling of your receivables as a ‘ loan ‘. That is not the case, it’s simply the case of monetizing or cash flowing your probably largest current asset, your receivables, and paying a financing charge, or discount fee for the service.

In general approximately 90% of the value of an invoice is advance to you pretty well the same day that you issue your invoice. Your normal obligation is to provide some sort of proof of delivery or acceptance of that invoice related to your goods and services.

We’re of the opinion that factoring receivables seems to be viewed as a small business financing tactic, but we can assure readers that some of the largest corporations in Canada utilize the tactic also – in some cases its simply jazzed up with a fancier name such as ‘ securitization’ or financing via ‘asset backed commercial paper ‘, etc. So the big boys are doing it also! Don’t forget that.

When clients talk about moving forward on this type of business financing the largest challenges seems to simply be their ability to understand pricing, pick the right firm to work with, and finally, to ensure that the daily flow of paperwork around this type of business financing makes sense. If the wrong factor partner is selected there are countless stories out there of firms who have experience a negative level of customer intrusion around the whole factoring receivables process. So choose your partner well, and probably the best info or advice we share in this regard is to seek the services of a trusted, experienced and credible business financing advisor who can steer you towards financing and cash flow success.

A common question related to our ‘primer’ on factoring (also called invoice discounting or receivable financing) is: ‘ Do we qualify ‘. The short and positive answer is absolutely, if you have receivables you qualify, that’s what this form of business financing is about.

Many business owners or their financial manager’s struggle with the cost of this type of financing which typically is in the 1- 2.5% range in Canada. The bottom line on the costs is simply that they will vary relative to the size of your receivables, the perceived credit quality, and the type of firm you contract with in this regard. That’s where the help of a Canadian business financing expert can help you immensely. In fact more often than not that expert can demonstrate how you can significantly reduce the cost of financing receivables to almost zero in some cases, but certainly a reasonable amount in most situations.

So whats our primer summary on receivables and business financing via factoring. It’s simply that if you’re reading this you probably have a business financing challenge. A/R financing is a method to eliminate that challenge. Working hard on your financing is commendable; working smart on your financing with an expert is a must. Investigate the solution that will bring cash to your firm’s door tomorrow.

Wondering About Financing Small Business Loans?

Many small companies in the US expect some growth opportunities in the next year. That is the great news! The bad news? Financing opportunities are looking bleak, particularly if the business owner has less than great credit, or a new business. Why would you need to know about financing small business loans? The main reasons for small business financing are to receive working capital and funds for capital expenditures.

It used to be that applying for business cash for a smaller business was fairly straightforward. You’d pay a visit to your local friendly banker and talk about your business needs. You’d discuss what you needed and they would help with financing a business loan – yours, to be exact. Then, the financial crisis hit, and banks closed ranks and decided that loans for small business were too risky. Business cash almost dried up. The big losers? Small business owners.

Now, we see the result of lack of financing: many small companies are either struggling to stay afloat, or are finding it almost impossible to capitalize on upcoming opportunities. In a recent Year-End Economic Report published by the National Small Business Association, nearly 40% of small businesses report they are unable to acquire adequate means for financing small business loans they deem necessary for their business to continue and grow.

What are the options for companies to get the business cash they need? The large corporate bankers and small locally owned banks are not the alternative they have traditionally been. You may feel that your business is a captive being held by the current economic situation and credit crisis. What you may not know is that there is a great source of alternative lenders who can provide working capital for small businesses. It is possible for loans to be secured against cash flow or your accounts receivable. In addition things such as inventory and purchase orders can be considered. Do you own property, machinery or equipment? These things as well may be leveraged to secure loans for small business.

What happens when your long time banker tells you there is no money for your business? Don’t give up and think that all is lost. There is help just around the corner for you. Business lending has changed. It may seem a little different to do business on the internet, but that is the new way. You just may be able to get the financing you need when the bankers say “No way.” Asset-based lines of credit may be the way to go in this Brave New World.

Typical banks are just no longer willing to extend traditional financing to the small company owner. There are many reasons for this, some of which are tightened federal requirements, as well as skittish investors who only look at the bottom line. These factors combine to make it seem that any loans for business may seem quite impossible. But don’t believe that! There is a whole new world of private banks and small business lenders who welcome your business. Once the level of risk of the business being financed is determined, you may be pleasantly surprised by the rates and terms you may be offered. Take advantage of the growth opportunities for your business. Grow your business just as you’ve dreamed.