Moment of truth time. You did the research. You put in the work. You compared and contrasted the businesses until your eyes went crossed. Negotiations are finished, and both you and the seller are ready to make it official. It's time to talk about financing.
The money has to come from somewhere, and since no one has figured out how to grow it on trees (yet), we need alternative methods to fund our business buys.
There is a surprisingly long list of ways to secure funding to purchase a business - and none of them are "more right" than others. (Though, if we're being honest, some of them are complete garbage, so we don't talk about those.) Ultimately, the route you decide to take will depend on factors like the type of business, the amount you need to borrow, credit history, collateral, etc. Below are the Top Four we recommend as a starting point.
SBA 7(a) Loans:
Small Business Association Loans are an obvious choice. (It's literally in the name.) These programs are designed specifically to make it easier for small businesses to get the funding they need.
Here's how it works: The lender makes the loan, and the SBA guarantees it will repay up to a certain percentage if you default on that loan. (85% for amounts up to $150,000 and 75% for amounts greater than $150,000.) But this isn't a get-out-of-jail-free card. They will do anything to collect your debt, only falling onto the guarantee if all options have been exhausted. It's still a loan. It still needs to be paid back. And it still needs to be used responsibly. You can borrow up to $5 million, and the approval turnaround time is typically 5-10 business days.
There are many different places to access SBA loans, and you should rarely (if ever) go through a bank that doesn't do a lot of them. We suggest starting here for the list of 100 most active SBA 7(a) lenders in the United States. It's updated quarterly and shows you those who know what they're doing - and, more importantly, those who don't.
Under the umbrella of the SBA loans, there are two more worth mentioning:
With the guarantee of an SBA loan, there are some strings attached. (Aren't there always where the government's concerned?) To qualify for a 7(a) loan, you have to meet specific eligibility requirements, including:
Traditional Commerical Loans
Back in the day (we're dating ourselves), the only way to get your hands on a large amount of cash was to either rob the bank or borrow from the bank. And since we don't condone theft, we'll focus on the latter of the two.
Bank loans are the OG of money lending and can still be a great option. You don't have the same eligibility requirements as you would with an SBA loan, so you have more freedom to use the money at your discretion. You can also improve your credit score by making on-time payments.
But there are some downsides compared to SBA loans (and remember, the only way we can tell if something is "good" is by comparison). Because they don't come with a government guarantee, it may be harder to get approval from the lender. A good credit score, collateral, and strong financials may be needed to secure the amount you want to borrow at a reasonable interest rate.
One of the newer options on the table, peer-to-peer lending, has really changed how we borrow money over the last several years. Rather than relying on a banker in a business suite to crunch the numbers (and potentially crush our dreams), we can tap into the power of the people - and the power of their pocketbooks.
Between 2006 and 2018, lending platforms provided more than $48 billion in consumer loans, and it's expected to increase to $150 billion per year by 2025. P2P lending is excellent for investors who are looking for ways to make their money work for them - and great for borrowers who may have a more challenging time obtaining financing via a more traditional route. They can also offer lower interest rates and origination fees due to competition between lenders.
Check out this overview of eight of the best peer-to-peer lending sites to get started. You can compare APRs, term amounts, how much you can borrow, and which one is best for you and your particular needs.
This last option is a bit more unconventional than the previous three but has plenty of advantages going for it. Rather than going to a bank or lender or another entity to put cash money in your hand to purchase a business, you will work directly with the seller to "pay them off" over time.
After you take ownership of the business, you'll enter into an agreement that uses your future profits to pay the seller, with interest, over a set amount of time (possibly monthly or quarterly payments over X number of years). No credit checks. No lengthy approval processes. Less red tape overall and more motivation for the seller because the interest you pay is going into their pockets, not the banks.
There are some downsides. Seller financing typically requires a substantial downpayment, so if you don't have that type of money sitting in the bank, you'll need to find it another way. Additionally, businesses sold via seller financing will probably come with a higher price tag since they save the buyer the hassle of obtaining financing.
Hacking the System
No man is an island…and neither are these options. It doesn't have to be a one-and-done approach; there are ways to "hack the system" (legally, of course) to purchase the business without using a dime of your own money.
For example, let's say you want to buy a business through seller financing. They need a 40K deposit to make the deal happen. Do you plunk that amount down on a credit card? (I mean, you could, but probably not wise.) Instead, apply for a P2P loan to cover deposits or cash flow. Or you can take out an SBA 7(a) loan for the total amount. You'll have enough to cover the deposit and can continue paying the seller over the agreed-upon number of years from your profits. And since the SBA loan money is just sitting with you in your bank, you have some breathing room to cover unexpected costs or even reinvest in the business itself.
One More Time for the People in the Back
We said it before, and we'll say it again (and again): Compare, compare, compare. Funding isn't one-size-fits-all. Take a close look at all of your options on the table. Try a few on before tearing off the tags. Consider prepayment penalties, interest rates and terms, and all the nitty-gritty details before signing any dotted lines or entering into any formal agreement. You'll thank us (and yourself) later!