Business Purchase Financing
By Peter Seigel
Most lenders insist that business buyers/borrowers “have some skin in the game”
i.e. a down payment on a business purchase. Most lenders require anywhere
between 10%-30% down on a business purchase depending on the type of business,
the deal structure, and the lenders general requirements.
All lenders are different, and many times their requirements change throughout
the year. Below are a few ideas that can be utilized to maximize the amount for
a down payment on a business purchase and to obtain financing to complete your
deal.
Here are a few ideas of where to source possible sources for a down payment:
Cash & Savings – An obvious source for a complete or
partial down payment. You do not want to utilize your entire pile of cash since
lenders will be accessing your “personal liquidity”. Lenders do not want you to
utilize all your cash on a down payment in case the new business you purchase
has a few bad months financially. They want to make sure you have the funds
personally to pay your families monthly bills etc.
Cash Gifts From Family Members – Many lenders will allow gifts
of cash as long as there are “no strings attached” i.e. they are not meant as
loans. As long as a letter from the family member providing the funds spells
out that the gift is solely for a business purchase and not a loan you should
be fine with most lenders and financial institutions.
Home Equity – With home equity growing rapidly many buyers
utilize these funds to either buy a business or utilize it for a down payment.
Before you pull all your funds out of your house for a down payment make sure
it will not jeopardize the deal and structure of the deal in case the equity
(or partial equity) would be needed to help secure a loan!
Owner Financing – Usually the buyer will put down 20% to 50%
(utilizing one of the methods included in this article), and sometimes the
owner will carry back a note of between 10% and 50%. Interest rates vary on
seller notes but they usually will be higher than banks or commercial
resources. Even though the owner takes back a note – the buyer of the business
still needs to “inject” a down payment between 10% and 30% of the total
purchase price.
Retirement Funds/Plans – Many buyers have built up sizeable
amounts in their work 401K plans. There is a way to tap this money tax free as
an investment for your retirement account. Many corporate refuges/individuals
coming out of corporate America are going this route. Be sure to employ the
services of a reputable retirement account facilitator in order to ensure this
is structured properly.
The key to all this is to be creative – possible tapping several of these
sources to get your down payment funds together. Keep in mind to start this
process early (pre-qualify and arrange for your down payment to be liquid and
ready so that when you do find a business to buy and need financing you are
ready to go!