If only I was paid a penny for every merchant who came to me thinking that they could finance the company without money down. The truth is this and it has absolutely nothing to do with the current financial crisis. You cannot finance a company without money down. Now, before e-mail fills in my mailbox with exceptions, let me explain myself.

Financing a small business requires one of these two options: Advance payment from the buyer and seller to finance the balance, or 100% purchase by the buyer without financing the seller. Let us discuss them in more detail.

Prepayment and financing of the seller:

No seller in his mind will sell the business without some form of prepayment. The buyer must have a capital investment in the business so that the seller feels comfortable financing the balance sheet and, more importantly, transferring the business to the new owner. Without this equity capital, the buyer is not exposed to risk and could simply leave at any time.

A typical prepayment for a small business with financing from the seller will vary completely depending on the transaction. The seller’s motivation will play a huge role in this equation. One seller can accept 20%, another even 80%. Usually, sellers would like the advance payment to be close to 50%.

Seller’s Terms and Conditions Financing Financial Notes:

Negotiate with the financing of the seller so that you are 100% comfortable in the ability to cover the debt service with business income. A good place to start would be to look at the seller’s note depreciated over 5 years (60 months) with an interest rate of 6 or 7%. (Use the Mortgage Calculator or Bankrate.com Automated Calculator to calculate payment) In the case of larger transactions, funding can be spread over as long as possible 10 years with balloon payments due within 5 years. Balloon payment means that you will have to pay the balance at the last payment.

So now, when we know that an advance payment will be required, where and how will we get the money? There are several sources of personal savings, family, friends, private investors, and banks.

The bank finances the prepayment or 100% of the purchase:

If you decide to use a bank to finance an advance payment method, there are some key facts to understand. Today banks require buyers to make an advance payment of at least 15 – 20%. This is the money you have to come up with in order to get a loan. In addition, you will need to have industry experience or the least management experience and a good credit score to even qualify for a loan. Yes, that’s true. You will need to have a good credit rating. Then you will take a close look at the company’s 3-year financial history. If your company does not have strong financial tax records, you should consider a personal loan from a bank, because business credit is not an option.

Personal loan:

If you have a good credit, you may be eligible for a personal loan from a bank, which you can use as an advance on repayment or purchase. You may have a house that you can refinance, a CD to borrow or other assets that can help secure your loan.

A common misunderstanding on the part of bankers:

This is very common in bankers who do not specialize in SBA loans to, unfortunately, mislead buyers, believing that they can easily give them credit. It is not the fault of the bankers; they are simply trying to bring new business into the bank. The truth is that few bankers know anything about buying or financing a business. In my opinion, they are simply introducing a new proposal, they are processing credit, and behind the stage, there is a team of underwriters who are decision-makers and who have restrictions in place. The best way to find a qualified SBA credit broker is to contact your local business broker and ask them for their opinion. Business brokers are an excellent source of funding.

Banking Qualifications Needed for loans for small businesses:

  • Experience
  • Cash advance payment 15%-20%
  • 3 years of profitable financial history of the company

Negotiate and make transactions:

Now that you understand the financing structure required to purchase a company, contact your local business broker and look for a company for sale that meets your requirements. Once you have found this excellent business, the broker negotiates financing terms for you with the owner. Remember that the broker has every incentive to get an offer and they will go to great lengths to get prices and working conditions.

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