Financing Your Business Purchase
A variety of sources are available to assist you with financing your business purchase.
Banks and Other Lending Institutions
While some capital and a good credit score are prerequisites, many banks also give equal if not more weight to the business’ history of revenue generation and debt accumulation. Many of these institutions will also look at your qualifications to run the business based on your skills and business plan. Your credit score will be a factor in determining your credit worthiness.
In many instances, the bank will secure the loans through the Small Business Administration’s (SBA’s) 7(a) or one of its affiliated loan programs.
Small Business Loans Backed by the Small Business Administration (SBA)
The SBA’s loan program guaranties a portion of the loans for start-ups and existing businesses, a program that helps to minimizes the risk for the lending institution and facilitates the flow of capital to the small business sector.
The SBA does not make the loans directly but through its portfolio of approved lenders, including banks, credit unions and other participating lending institutions. Your best place to start is with one of these lenders. Your loan officer will be able to guide you through the process. An overview of the SBA’s loan programs is available at Quick Guide to SBA Loan Programs.
Seller financing is when the owner of a small business allows the buyer to pay some of the purchase price in the form of a promissory note. Seller financing to strengthen their position for a quick sell. We can provide you with a template to structures such deals, but have your legal and financial advisers review and modify it to ensure your interests are protected.
If family members are in a position to help, they are investing in your future and their own. These agreements are sometimes structured so that the lending individual receives a percentage of the annual cash flow or gross income. Others specify a rate and term. Your legal adviser can develop an agreement that allows details the obligations, duties and terms of both parties.
Alternative non-bank lenders have also come into the market place to fill the gap for borrowers whose credit histories make it difficult to secure loans through the traditional lending sector. These lenders recognize that credit scores are not the only indicator of loan repayment. The terms of the loans tend to be shorter and the rates higher. Some alternative lenders cited in a March 5, 2014 New York Times article on alternative lending include Dealstruck, Fundation, and Funding Circle. Having never worked with these alternative lenders, Sunbelt New Mexico is unable to endorse or recommends these companies, and we recommend that you do your due diligence.) Discuss with your financial adviser if this is a viable option for you.
Business Loan Checklist
While the requirements vary between lenders, some of the more common items you will be asked to provide include:
- Loan Application
- Reason for applying for the loan
- How the loan proceeds will be used
- Additional assets might you need to purchase
- Biographies of members of your management team
- Resume: Some lenders require evidence of managerial or business experience.
- A Business Plan: This will include Profit & Loss (P&L) statements, cash flow, balance sheets, and filed tax returns for the last three years. The current owner will provide these documents.
- Credit Report
- Collateral: Collateral requirements vary, but strong business plans and financial statements can lessen this requirement.
- Legal Documents: These documents may include any required licenses, franchise agreements, commercial leases and Articles of Incorporation.