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Buying a business often requires you to have the money necessary to complete your acquisition. This can be achieved in a variety of different ways. No matter what method you finally choose to pursue, to be successful you will need to be aware that different sources of capital will have their own priorities.
So, to give you the best chance of securing the funding you need, let’s look at three possible sources of credit and consider how you should modify your approach in each instance to guarantee the best outcome.
1. Getting a bank loan
Perhaps the most formal way to get the money you need to buy a business, is to apply to access the loan capital which the banking sector has earmarked to support business. In the United States the most popular loan programs are the SBA 504 and 7A lending programs.
But note that these programs have strict rules, mean that applications from would-be entrepreneurs and the businesses they are looking to purchase are subject to a great deal of careful scrutiny.
As an aspiring business owner, for example, your previous business experience will be carefully evaluated. You will help your case further if you can also show you have a good grasp of general business matters such as accounting, small business and overall business planning. Any relevant qualifications you possess will also greatly help your cause.
As an example, if you were looking to buy a restaurant you should be prepared to detail and demonstrate what you know about the generic aspects of the relevant industry you are looking to invest in.
Any bank will also want to see you have a good personal credit record. You should also expect that a bank will probably require any loan they offer to be secured by collateral – most likely all of the business assets. They will also ask you to sign a personal guarantee and pledge your personal home as collateral as well.
And though, as a new owner, you will not have any track record of business performance to offer, you should be prepared for the bank to ask to see a detailed business plan. This should detail your business strategy, and also indicate precisely how you will spend the loan capital and what returns you anticipate on your investment.
Though this application procedure can seem daunting, if you succeed you will know your business proposal has been thoroughly tested. There are companies that can help you put together a plan for you.
2. Acquiring an angel investor –“friends and family”
This may be an individual or group offering funding to you because they believe in you or your business you are buying. One major business advantage of such a funding source is they can be flexible with terms depending on your relationship.
And provided your angel investor can see your business has real potential (and thus will bring them a profitable return), they may not be particularly alarmed by any high-risk factors in the deal like a bank would be.
The downside is understanding what happens of the capital is lost or the return is delayed. Make sure you have good legal agreements in place. These agreements might not be as expansive as a bank would require, but understand that this type of borrowing money can be tricky.
3. Seller financing
Seller financing can be a complex issue on both sides but where appropriate, seller financing can have a number of advantages.
For instance, any financing you receive will be easier to qualify for than from most other sources, and you will often get access to the finance you need much quicker. Furthermore, this arrangement means the previous owner has a powerful motive to see you succeed and will often be prepared to help in several ways.
In addition, it also implies the former owner believes you have the ability to make an ongoing success of the business in your own right.
But do remember that, even where seller finance is available, it will only be for a proportion of the sale price which is often about 50%. However, on the positive side, that may be a viable means of closing what would otherwise be a funding gap or any funding at all.
And in some circumstances another lending sources may look on your funding application more favorably if they know the seller has enough faith in you to offer financial support. Indeed, some lenders may even insist upon having such evidence before they proceed.
By Bruce Hakutizwi, USA and International Accounts Director for BusinessesForSale.com, the world’s largest online marketplace for buying and selling small and medium size businesses.