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Buying a Business – Understanding Small Business Financing

As a business broker I am frequently discussing with clients and prospective buyers methods of small business financing. Once a buyer and seller agree on price and terms, it all boils down to due diligence and financing.

A lot of factors can determine how lenders will view your deal. It will depend on the type of lender, type of business, and what kind of assets does the business own that can be used as collateral. Is there real estate involved in the transaction?

A commercial banker or loan broker will show you what factors matter most and get your deal funded with their products.

Cash and Equity

Of course, if you’re paying all cash, none of this is your concern, however 100% cash deals are not the norm.

Every business is unique and different, but one thing is certain before you seriously consider pursuing a business for sale: You or one of your partners will need sufficient liquid capital or equity for anyone to finance your deal.

Bank Financing

The stories of a “no money down” deals and 90% seller financing are rare and I have personally never seen one that was legitimate.

Again, depending on various factors, when acquiring small business financing through a commercial lender, there is a good chance you’ll need 20-40% cash/equity down on the business, financing the balance with debt capital.

You will probably pay “prime + 2″ in interest, meaning if the prime rate is 8%, your interest will probably pay 10%.

The term of the loan will probably be 5-10 years. Many of the commercial loans I’ve seen are 7 year terms.

Business with Real Estate

If you are acquiring real estate in addition to the business, many products are available as “Blended Loans”. These loans are “blended” with the standard “real estate loan” (10% down, 30 years).

You end up with roughly a 15% down payment, and a term of 18 – 22 years, which is great for keeping your debt service down and increasing your Cash Flow.

On the other hand, 15% of business and real estate can still be a sizable down payment.

The cost on the “blended loan” will likely be more favorable as well with the real estate as collateral.

Seller Financing

Most small and mid size companies will involve a portion of seller financing.

It is appropriate to amortize the financing over a period of time and have a balloon after 2 or 3 years.

This way the financing serves two purposes: Funds the deal and shows that the seller has confidence in the business – and the buyer.

How to Finance a Small Business Quickly

There are many ways to finance a small business quickly. Depending on individual circumstances funding ranging from grants, personal loans, bank loans and venture capital can be obtained. You need to get prepared when shopping for funding because without a very elaborate plan, getting funding can be an uphill task.

Bank loans are suitable for those who have already established their businesses and are already running. Commercial banks can request that you supply them with your operating accounts for some months or even years to enable them evaluate the profitability of your business hence make decision to lend you or not. However, you will have to write a business loan proposal that outlines your need for funding together with the current and projected future information on cash inflows.

Microfinance institutions also offer business loans for individuals and groups. While their application requirements are not very strict, you must demonstrate real need for financing a sustainable and profitable business venture. However, they prefer to lend to groups since each member of the group guarantees another hence reducing the lending risk. Some microfinance institutions target a specific segment of clientele hence you will need to gather information if you qualify to get financing from these institutions.

Venture capital is also an easy way to finance a small business. The proprietor of the business parts with a certain agreed equity of the business and in return the allotees of the equity finances the business to the agreed amount, then the profit of the business is shared between the financier and the proprietor.

Some governmental and non governmental organizations can offer grants to enable people finance their small businesses. The amount is limited but can be of a great help especially when there is a need to put the business running. This way of financing is really good since it cannot be repaid back, unlike loan which requires you to pay back together with interest.However,you will be required to account for the use of the cash advanced to you to ascertain whether you used for the right purpose or not.

Personal savings can be of great help in funding a small business. Bearing in mind that the amount invested will not be paid back and remain part of the business capital, much relief also exist because payment of interest on such capital is at the discretion of the proprietor.

Loans from friends and relatives can also be a quick way of financing a small business. Since this does not require many formalities, an individual can just request for cash from his or her friends and relatives. This can be granted within the shortest time possible.

If the business is trading, you can request for trade credit from your supplies. This is an arrangement that can enable you obtain stock on credit and sell then repay your suppliers at a later date. This is a very convenient way of small business financing and in addition to using the credit facility; you can also enjoy cash and quantity discounts.

Small Business Financing – Finding Capital For Your Business

Starting a small business is an exciting adventure. From writing out the business plan to executing the minor details, the thought of being your own boss is thrilling to many people. However, not everyone who wants to begin a business has the funds available to make their dream a reality.

The good news is that because the government wants to see small scale businesses continue to grow and thrive, there are many financing options made available to those interested in becoming an entrepreneur.

- Grants – Perhaps the most appealing way to begin a business would be for free, and grants do not have to be repaid. However, the application process is quite intense, and the competition for funds is extremely fierce. Therefore, it is best not to rely on grants as your sole source of capital.

- Micro and SBA Loans – Micro loans are loans of amounts from $5,000 to $35,000 that can be used for any business purpose. If a loan is made to a small enterprise by a private sector lender such as a bank, they can be guaranteed by the SBA.

- Franchise Financing – If your business dreams include the purchase and operation of a franchise, you may be eligible to apply for specialized financing. Franchisees operating certain well known businesses are the most likely candidates for this type of financing.

- Development Financing – Businesses in need of capital for the development of land or buildings may be able to receive special financing with a long term and fixed rate program.

- Personal Loans and Equity – Finally, you can also seek help from friends and family by requesting a personal loan. Be prepared to have a detailed business plan. It is also recommended to have a formal contract written up to avoid legalities between loved ones. Alternatively, if you have equity in your home that you can withdrawal, you may consider writing yourself a check to begin your new enterprise. These options should be used as a last resort.

Finding and securing funds to begin your small business doesn’t have to be a daunting task if you know where to look. Some options will be more viable than others for you, depending on the business you are starting or the capital that is needed. Keep an open mind and a steadfast attitude, and you are sure to find the answer that best fits your situation — and business.