Great article from Peter Seigal at Bizben
For those of you looking to buy a small business, there is good news on the lending front. More lenders are coming back into the market for business purchase financing. After years of being very selective about what they were financing, I am seeing many lenders who are more open to financing projects they would not have in the past few years. For example, many lenders were staying away from awarding larger amounts of financing, say $1 million or more. Today that is changing.
I am also seeing more non-SBA lenders who are financing business purchases. These tend to be individual investors that pool money, credit unions and small niche financial institutions. As in most improving economies banks and other financial institutions tend to be more receptive and that is exactly what I’ve been seeing as my clients go secure a business loan. However, just because conditions are improving doesn’t mean that securing business purchase financing will be attainable for everyone. Lenders are still being strict about who they are lending to and how much. Despite an improved outlook, lenders still want to make sure their loan gets repaid and for that, you need to be prepared! Before trying to get a loan this year, here are 3 things you need to know.
#1 – Learn About Your Options
As we’ve seen in previous years, getting a business purchase loan is no longer a matter of just walking into a lending institution and walking out with an approval. Many business buyers have had to get creative in terms of where they secure financing from and that will be no different in the upcoming year. As a business buyer, I suggest you learn more about your options and really evaluate what kind of capital you have access to before you approach a traditional lender for funding. While lenders are lending again, many people have less than perfect credit from the recession and as a result have a difficult time qualifying for traditional financing. Being prepared with alternative funding sources is always a good idea regardless of your credit.
Crowd funding, borrowing from retirement and borrowing from friends and family have all become popular alternatives to traditional financing. I have also seen other Entrepreneurs opt to take on short term partners that can help them finance their business transactions but be bought out at later time. Also home values are on the rise so many buyers are using their home equity toward financing a business purchase. Depending on your situation, your home equity may not be enough to finance the entire deal but it could provide a nice down payment. Know your options!
#2 – Explore Seller Financing Options
Today, there are a lot of sellers that are willing to extend financing to the right buyer. In fact, many lenders now require that the seller be a part of the financing mix. It proves to the lender that the seller truly believes the buyer has what it takes to buy and run the business successfully. To a lender, this ultimately means they will get their money back.
There are a few things you should know about seller financing. One, you will probably pay more for the business. When a seller offers financing options they are taking a risk, so that risk comes with a price tag. Two, you need to be prepared to prove you are capable of running the business. Be prepared to write a business plan and to explain why you are going to be successful, it’s part of the process.
As you can see, there are many options to explore when it comes to securing financing. As a buyer, it’s your responsible to learn about each and determine which may be the best fit for your situation. Going to the right financing source is half the battle when it comes to getting approved.
#3 Prepare, Prepare, Prepare
I can’t stress this enough. Preparation is critical. Buyers need to get information before they make an offer and get too involved in the sale. I suggest you get professionally pre-approved for financing and work with someone who understands how deals are structured to start you off in the right direction.
Buyers also need to be realistic about what it really means to buy a business. For starters, they need to be realistic about what they can afford. Don’t try to buy a business that costs millions of dollars when you have no money to contribute to the sale. Start smaller and work up to that. Next, buyers need to know their limitations when it comes to the business itself. A buyer will be asked about their previous work experience, credit score, current salary if they are working, annual living expenses, outside sources of income, etc. so be prepared to share information in order to complete the transaction.
Lastly, understand that business purchase financing is a specialized form of financing. With that, getting approved really comes down to going to the right person at the right financial institution. Making that type of connection doesn’t come without preparation and it typically doesn’t come without the support of a specialty advisor in business purchase financing, so choose a good advisor/team to help you through this process.