Most individuals will require some level of financing to acquire a business. It is important to remember that the seller probably does not have this added financial burden, hence it is important that you budget your cash flow in-order to ensure that you can pay the interest and principal payments on time.
Debt payments, interest and principal, are made from your cash flow not from your profits! |
Financing can be arranged through:
- Banks and Financial Institutions;
- Private Investors;
- Family and Friends;
- The Seller.
Banks and Financial Institutions:
Banks and other financial institutions provide loans based on collateral. However, banks also want a reasonable comfort level that the individual managing the business is going to be successful. Banks prefer to lend funds to individuals who have borrowed before and have a proven track record of success in the type of business that they are undertaking. It is unusual for a bank to provide funds without at least 150% collateral and in many cases as much as 200% collateral. Banks will usually require personal guarantees and will want you to pledge any hard assets such as your home, car and any securities that you may have such as stocks, bonds and insurance. Interest rates will very, from prime to 3 to 4 points above prime depending on their comfort level that you will be able to be successful and pay back the loan under their terms and conditions and as well the value and liquidity of the collateral that you are pledging. Depending on the financial institution there will most likely be an initial charge to process the loan application. This amount can be as much as 0.5% of the loan value.
Some banks and financial institutions will be able to offer you SBA (Small Business Administration) loans. These loans are funds obtained and secured by the Federal Government. The SBA program has been put in place to encourage the investment in small business (the backbone of the American economy). SBA loans are generally expensive (5% of the loan value up front) and time consuming to arrange. In some cases a Business Broker, if there is one involved in the transaction may have pre qualified the business at the time that he received the listing for an SBA loan in which case, if you meet the basic SBA guidelines the pre qualification will shorten the time span for approval. For further information you can visit the SBA web site at www.sba.gov
Private Investors:
There are many private investors who are prepared to finance individuals in business. Private investors usually want as much if not more security than a bank and their interest rates are generally higher. Private Investors are more interested in the collateral and its liquidation value then a bank or other financial institution and in most cases if they believe that the collateral fully covers the loan they will not look at management capability as much as a bank will.
Family and Friends:
There are advantages and disadvantages to borrowing money from family and friends. Interest rates are usually lower and family and friends will probably not be quite as quick to seize any assets that you may have pledged as collateral to them should you be unable to make a payment. However, more friendships have probably been ruined because of nonpayment of debt than any other reason.