Guidelines for Acquiring Capital for a Business Acquisition
Buying an existing business can be an attractive option for entrepreneurs, offering a proven business model, an established customer base, and systems already in place. However, financing a business purchase can be a daunting task. This article provides an overview of various financing options available to help you navigate the process.
One of the most common ways to finance a business acquisition is through a small-business loan, also known as a business acquisition loan. These loans can be obtained from traditional banks, online lenders, or through seller financing agreements.
If you're considering a traditional bank loan, be prepared for a rigorous application process and usually, collateral is required. Maximum bank term loan amounts typically range from $100,000 to $3 million, and repayment terms often vary from one to seven years.
On the other hand, online lenders offer loans with more flexible requirements and faster approval times. Repayment periods for online business loans can range from three months to seven years, depending on the lender and loan amount. Notable online lenders for small business acquisitions include Dr. Klein, OnDeck, iBusiness Funding, and National Funding, each offering loans with varying maximum amounts and credit score requirements.
One of the advantages of online lenders is that they often cater to borrowers who lack sufficient cash for a down payment but have valuable assets or predictable cash flow in the business they are purchasing. This is known as a leveraged buyout. Another option is debt assumption, where some of the business's debt is taken on to reduce the purchase price.
SBA loans, partially guaranteed by the Small Business Administration, can cover up to 90% of a business's purchase price. However, the application and funding process can take up to three months, and they have strict eligibility requirements. SBA 7(a) loans have a maximum loan amount of $5,000,000, a minimum credit score of 650, and borrowers must contribute a 10% equity injection (down payment).
Seller financing allows entrepreneurs to approach a business's owner and agree to repay a portion of the purchase price over time. This can be an attractive option for both parties, as it allows the seller to receive payments over a longer period, and the buyer to spread the cost of the purchase.
It's important to note that each financing option comes with its trade-offs. For instance, while online lenders offer more flexible requirements and faster approval times, they often come with higher interest rates and shorter repayment terms compared to SBA or traditional bank loans.
Buying an existing business can provide numerous benefits, but it also comes with potential challenges. Inheriting past financial problems and existing issues need to be addressed. Therefore, it's crucial to thoroughly research the business and its financial history before making a decision.
In conclusion, there are various financing options available for buying a business, each with its unique advantages and challenges. By understanding these options, you can make an informed decision and find the financing solution that best suits your needs.
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