Peter  Siegel

Article Summary:

How to finance the purchase of a business through several different means.

How To Finance The Purchase Of A Business

Financing a small business purchase, or getting cash for a down payment can take many forms. Hopefully the options listed below will give you some ideas where you can find the money to buy a small business!

Credit Cards
Many buyers these days are tapping their credit cards for their down payment to buy a business. The downside of this option is that if you are getting an SBA loan to buy a business, they won’t let you use “a credit card/loan – borrowed money” for the down payment.  Other than that this option works for many since there is no waiting for the money or cumbersome approval process.

SBA Loans
Many businesses today are purchased with 7a SBA loans. There are conditions however in getting one to buy a business. You still have to put down between 15%-30% depending on the lender, you must have good to excellent credit, and the business has to have PROVABLE cash flow to support the debt service of the loan. The loans are typically 10 years in duration and 2-3 points above the prime interest rate. The process of getting an SBA loan to buy a business can be a tedious one and can take one month to six months to complete/fund. All lenders are all different when it comes to underwriting requirements, etc. – select wisely!

Home Equity
With home equity growing rapidly many business buyers utilize these funds to either buy a business or utilize it for a down payment. At this time rates are low and lenders are eager to give out home equity loans. Loans can usually be secured rather rapidly, but plan ahead and get the process moving so you don’t miss out on any great businesses that come out on the market for sale.

Owner Financing
This is the most common form of financing. Usually the buyer will put down 20% - 50% (utilizing one of the methods above), and the owner will carry back a note for a duration of usually two to ten years. Interest rates vary but they usually will be higher than banks or commercial resources. Sometime there will be “combo” financing with the owner taking back a partial note and the rest of the financing will come from the above resources.

Retirement Plans
Many buyers have built up sizeable amounts in their work 401K plans. There is a way to tap this money tax free – put it into a “special trust” that then buys the business for you.  Many corporate refuges/individuals coming out of corporate America are going this route.

Note Buy Out Firms
There are companies and individuals who buy notes sellers have taken back. Get your possible deal in front of these individuals to see if they would be interested in buying out the note after you have completed the deal – this may sway some sellers who want all cash for their deal and don’t know about this creative financing option!

They key to all this is to be creative – possible tapping several of these sources to get your deal done.  With all these resources along with cash in the bank and possible some relatives who may want to invest in your new business – you should have no problems with the financing end of buying a small business!

Peter Siegel, MBA is a nationally known consultant and author - with over 25 years experience on the topic of selling, buying, and niche financing (the purchase of), small to mid-sized businesses. His latest book, "Businesses For Sale ? How To Buy Or Sell A Small Business" is available online and in bookstores. In 1994 he founded BizBen.com and later USABizMart.com ? two of the leading business for sale, business opportunity, & franchise for sale related websites, and he presently writes a syndicated small business blog at and produces a Podcast which focuses on issues, educational events, and information related to buying and selling small to mid-sized businesses.

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