How to finance a business acquisition is a critical factor business owners face when evaluating the merits of an acquisition. A loan from the Small Business Administration is an attractive option for established businesses in need of financing. Sometimes, however, it’s hard to get approved for an SBA loan. If you do not qualify for an SBA loan, there are plenty of other lenders who are willing to work with you on business purchase financing. Following are several types of non-SBA loans that you should consider when buying a business.
Between 60 percent and 90 percent of business acquisitions involve seller financing. This form of business purchase financing allows you to operate the business while you make payments to the seller. Because the seller is interested in selling the business rather than making money on interest, you can often negotiate better terms and reasonable interest rates.
This type of equity financing involves an investor providing cash in exchange for shares in the business. In some instances, the investor wants to take an active role in the company in addition to receiving shares. Funding may come from a venture capital firm or angel investors (wealthy individuals looking for high returns on their investments) and can take several months to obtain. Friends and family members are also potential angel investors. Some venture capitalists and angel investors make loans without taking an equity position, but the loans usually carry an interest rate of 20 percent or more.
Conventional and Commercial Loans
One advantage of a conventional or commercial business loan is that the lender doesn’t want a say in how you operate the company. Bank financing usually takes two to six weeks to complete; loans are typically between five and nine years. Interest rates are competitive, can be fixed or variable, and depend on the collateral and length of the loan. Personal guaranties are invariably required.
Some commercial lenders loan money based on the value of the company’s assets as collateral. There are several advantages of an asset-based loan: it’s easier to get than a line of credit or bank loan and you can obtain it quickly. The downside includes low asset valuation and the risk of losing your assets if you default on your loan.
Using personal assets such as retirement funds, lines of credit, credit cards or a second mortgage secured by your home is another business purchase financing option. This choice carries some risk: maxing out your credit cards can lower your credit score and withdrawing retirement funds can lead to penalties if not done correctly. A good rule of thumb when using this type of financing is to risk only what you can afford to lose.
Regardless of which type of financing you’re considering, Links Financial has long-established relationships and can connect you with a variety of financial resources. When you partner with Links Financial, the question of how to finance a business acquisition using non-SBA loans becomes a lot less complicated.