The entrepreneurial story we tell ourselves is full of flaws. You can’t come up with an idea in your garage or spy a cute coffee shop for sale downtown and simply waltz into your bank for a small business loan to cover the entire cost. It’s just not how it works. 

Why?

Banks are gun shy about risks in general, but even more so since the debacle of 2008. Small business ownership is risky, particularly if you are trying to start a business from scratch. According to the U.S. Bureau of Labor Statistics 65% of businesses fail in the first 10 years, 45% fail in the first 5. 

What that means for future borrowers is your local bank isn’t likely to grant you a small business loan for your start-up. They are also unlikely to fund the purchase of an existing business. 

If the bank is out, where can a business buyer get financing?

The most common source of funds is the buyer themselves. Using property for collateral, sourcing capital from friends or relatives or using savings can typically generate enough to buy a business. If you’re going to own your own business, you’re going to have to get comfortable with putting your own skin in the game. A caveat here, if you are borrowing form friends and/or relatives a handshake deal will not suffice. You really need to consult a business transaction attorney and have some sort of contract before you take money from people you know. It will save everyone involved from the issues that can quickly arise when money needs to be paid back.

Another common avenue is a loan from the Small Business Administration (SBA). This path obviously will have it’s share of red tape, and not all businesses currently for sale will qualify for this type of loan – but it can be a great way to secure a business without having to fund the entire purchase yourself. Talk to your business broker about how you might qualify for a SBA loan and what businesses currently for sale would work for this scenario.

In many situations a buyer can also get financing from the seller themselves. This is called seller financing and many small business owners use this as a way to attract buyer to their business. A seller willing to keep skin in the game says a lot about how they think the business will do in the future (if the business fails they don’t get all of their money) and it opens the pool of potential buyers to those who might not have all the capital they need up front. An important note here – no seller is going to finance the majority of the purchase price for a buyer. Buyers need to come to the table with a substantial down payment. Ask your broker if there are any seller financed businesses available in the industries you’re considering.

There are also creative ways to get a deal done. Earn-outs, angel investors and the like are possible – but unlikely. Your best bet as a buyer is to see how much capital you can raise on your own, research your options with the SBA and talk to your business broker about business owners who might offer you seller financing.

Have you always wanted to buy a business buy aren’t sure how to raise the capital? Would you like to know what types of businesses are currently offering seller financing? Ask us! Leave any questions or comments here and we would be happy to help.

Michael Monnot

941.518.7138
Mike@InfinityBusinessBrokers.com