Considering business ownership? The experts at Emerald Coast Business Brokers discuss what to expect when it comes to financing an existing business.
Financing an Existing Business vs. a Start-Up
If you’re interested in business ownership, as you embark on the process of reading and researching, you will likely find a significant number of experts who report that financing an existing business is less of a “gamble” than financing a start-up. That is, if the existing business is successful. Lenders are much more likely to fund an existing business that is profitable, has solid assets, a customer base that produces immediate results (i.e. sales), and potential for future growth.
An experienced Business Broker can help you identify successful businesses that fall into these categories. They can also help you negotiate a price that is mutually beneficial to the buyer and seller, and assist in finding financing for your business.
Where do I start when it Comes to Financing a Business?
Before you get too serious about purchasing a business, it’s important to start by ensuring that you would have financing available for a purchase should you find a business that lenders deem viable. Once you have done that, and your Business Broker has found a business that you are interested in purchasing, the most important step is Due Diligence. From a lender’s perspective, it is necessary that the business be in good-standing, and that it not be overvalued. Due Diligence is careful investigation and analysis of the business, including analyzing financial statements, physical properties, assets, relationships between the business and its customers, vendors, key suppliers, competitors, etc. Through this process you will scrutinize the assets and liabilities of the business. Though lenders will do their own due diligence, this is all information they will use to determine whether they will provide financing. Less risk = more likely to get financing. Go to potential lenders with a robust business plan that shows how you plan to grow the business (your Business Broker can help with this).
What type of assistance is available
Once you’ve done due diligence and you are ready to move forward with financing the business, the first place to look is your personal bank. Oftentimes a financial institution that is familiar with you will offer friendly terms and a lower interest rate. But don’t stop there. It is also wise to check with competing banks to determine if you can get lower rates or better terms.
Private lender. Going this route typically leads to a higher interest rate, but the loan process is normally faster and easier. This is sometimes a good option if you need a quick sale.
Investors. Create a good business plan that outlines how investors can earn their money back, plus some, and you’ll often be able to get investor financing.
Owner finance. This type of financing may cost more or have a shorter amortization schedule, but it is a good option if you have trouble qualifying for a bank loan. According to BizSale, more than 80 percent of business sales include some sort of seller financing.
What about the US Small Business Administration?
First, let me explain what the US Small Business Administration is. This federal agency was created by Congress in 1953 to help guarantee loans to small and mid-sized businesses. The SBA doesn’t make loans, but it establishes guidelines for loans that it will guarantee. By guaranteeing that the loans lending institutions make to small businesses will be repaid, the federal government reduces some of the risk to financial institutions so that they are more likely to consider lending to small businesses. Entrepreneur Magazine offers a very helpful (but long) comprehensive guide on SBA loans that is worth the read if this is something you are considering.
As you can see, the key to obtaining financing for an existing business is being prepared. Though it can be an overwhelming undertaking, a professional business broker can lead you through the process with ease.