Thinking about starting or buying a new or existing business? While that decision is undoubtedly a hard one, the next decision can be equally, if not even more, difficult. How did I pay for it? How to fund the purchase of a business is a question that we have help clients through countless times at the Strong Firm. For the purposes of this article, we will examine options of funding the purchase of an existing business, since most of the options discussed, absent seller financing, are applicable to funding a new business as well.
What about Free Government Grants?
Contrary to the claims of many late night infomercial pitch men, generally the government is not bending over backwards to give entrepreneurs grant money that does not have to be paid back to start a business. While it is true that there are some small government grants available to assist a very limited number of new business owners, the reality is that these funds are very difficult to acquire and the process in applying for and obtaining these grants is often prohibitively arduous and time consuming. I do not think that it is a coincidence that author of one of the most popular “free money for your business” books is currently serving a 10 year sentence in prison for fraud. The old adage, “if it sounds too good to be true, it probably is” rings very true when it comes to the claims of “free money” for your company. Our advice is simply, save the $59.99 to over $400 cost of these books, packages, and seminars and the months, if not years, it could take to chase the dream of a “free government grant” and invest that time and money in pursuing more proven sources of business funding. If you insist, however or determining if there are actually any government grants available that could assist you, pass over the infomercial books and programs and simply visit www.grants.gov , the official US Government website outlining available government grants.
How about SBA Loans?
Small Business Association (SBA) loans are a viable option for some new small business owners. Unlike with a grant, a SBA loan does have to be repaid. On common misconception about SBA loans is that they are very easy to obtain since they are “guaranteed” by the federal government. While it is true that the SBA loan program may provide an opportunity for an individual or small business to obtain funding that it would not normally be able to procure through normal channels, the process is not “easy” by any means. To secure an SBA loan the lender will review to factors: the strength of the business and the strength of the borrower/owner. To this end, borrowers will likely find it easier to obtain funding for the acquisition of an existing business with a proven track record than attempting to fund an unproven “start up company” with no financial history. In analyzing the strength of the business the lender will typically require 1) a formal business plan describing the nature of the business, annual sales, number of employees, length of time in business and ownership of the business and 2) business financial statements including complete financial statements for the past three years and current interim financial statements. In evaluating the strength of the borrower, banks will require and will examine the personal financial statements of the owners, partners, officers and stockholders owning 20% or more of the business. Contrary to the beliefs of many new business owners, it is almost impossible to establish “business credit” for your new business that is not directly and heavily tied to your personal finances. A lender will also typically further require a personal guaranty from any and all owners of the company.
Traditional bank financing is still available for acquiring or starting a new business, but many new business owners find the borrowing requirements difficult to meet. With often greater scrutiny than an SBA loan, traditional business loan lenders will evaluate both the strength of the business and the financial strength of the owners of the business. Many new businesses find that obtaining traditional bank financing for new or startup business is extremely difficult especially if the business does not have significant tangible assets that the bank can utilize as collateral. New business owners are advised to work with their regular bank/banker especially if they have enjoyed a long and productive relationship with that bank/banker.
Having the Seller of the business finance all or part of the purchase price of the existing business to be acquired may be an option that is favorable to both buyer and seller especially if traditional or SBA funding is not available. Obviously the upside for the Buyer is that it would allow them to purchase a business that they would otherwise not be able to purchase if SBA or traditional financing was not available and could be arranged to have feasible repayment terms that the Buyer could reasonably make. For the Seller, a seller financing option may be attractive, especially if it is a type or nature of business that is traditionally not able to fund through third party financing. The drawback to the Seller, obviously is that the purchase price is paid out over time and that the Buyers ability to payback the Seller is often contingent in part on the success of the business. If Seller financing is to be utilized, it is critical that both the Buyer and Seller be protected by utilizing sufficient loan and security interest documents. As long as the proper loan and security interest documents are used, Seller financing can provide a feasible and attractive alternative if other methods of financing are not available or desired.
Eric R. Thiergood, Sr.
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