Seller Financing
From the start of time, seller financing was the only choice available to buyers and sellers of businesses. More recently, the option of the Small Business Administration (SBA) loan has become available. However, in today’s tight credit market, seller financing is again returning to the forefront of how buyers finance the purchase of a business. Here are some of the reasons why seller financing might be the right choice for the seller as well as for a potential buyer:
· Seller financing offers reduced paperwork, shorter approval times, and terms that can be structured to fit a deal instead of adhering to the SBA "one-size-fits-all" terms.
· Sellers have a great deal of latitude in selecting the interest rate and a payoff period, which can result in a deal that works to the benefit of both parties.
· Sellers can structure significant tax savings by deferring income into future years, and buyers can feel good about the seller's confidence in them and in the company’s ability to service the debt. However, sellers will require a personal guarantee from the buyer and will retain a security interest in all of the business property transferred until the loan is paid in full.
· The seller who is willing to offer financing demonstrates continued financial involvement in the business. This gives the buyer more confidence that the sales and profitability claims made by the seller are true.
Retirement Plans
In considering the use of retirement investments as a source of business capital, buyers need to rethink some common misperceptions about retirement plans. IRAs and 401(k) plans are thought to be untouchable until age 59 1/2 or retirement. However, most plans provide a simple process to invest retirement funds in a new or established business without incurring distributions, penalties or taxes. This gives anyone with a qualifying retirement plan a source of investment capital. This is true for 401(k) plans, 403(b) plans, IRAs, SEPs and SIMPLE plans. Your CPA may or may not be aware of this option. The best person to talk to regarding this option is your plan administrator.In addition, VR Business Brokers of Fort Worth/Arlington has relationships with leading industry authorities who can advise buyers on how to roll 401(k) investments into the purchase of a business.
SBA Guaranteed Loans
There is often confusion regarding business acquisition loans that are guaranteed by the SBA. When considering SBA financing, always look for a lender with SBA-preferred status. Unfortunately, this may not be enough in today's market. The SBA is under daily review with policy and procedure being constantly revised. At VR Business Brokers of Fort Worth/Arlington we have local SBA lenders that are on top of this ever-changing situation. What is certain is that all SBA loans over $350,000 will be required to conform to a valid third-party valuation by certified appraisers.
At VR Business Brokers of Fort Worth/Arlington we make every possible preparation for your lending success. SBA loans are generally 10 years in length and are priced at prime rate plus a percentage dependant upon the strength of the borrower.
SBA loans require many fees, including packaging fees, loan guarantee fees and appraisal fees among others. These fees can add up to 2%-4% of the loan's value. Often, these costs can be added back to the loan amount. Typically, down payments on SBA loans vary between 10%-30% of the transaction value. Generally, most deals fall into the 20%-30% down payment range. SBA loans will require personal guarantees, security interests in the assets, and real property collateral if the business assets do not provide adequate collateral.
Home Equity Lines of Credit (HELOCs)
Because SBA compliance often requires a borrower's home as collateral, many business buyers have elected to just pull the equity from their homes to fund a business purchase. This is a popular option with several advantages. HELOCs (Home Equity Lines of Credit) can be prepaid, can require lower upfront costs and often can be repaid over a longer timeframe. Some buyers are able to get enough cash from their home to cover the entire purchase price or a very substantial portion of the price while asking the seller to carry a small amount. Because it can be a challenge to obtain a home equity loan in today’s market, sellers are now often more willing to provide financing to a buyer. The seller will want to be in second position after your mortgage company if you go with this option to finance your business purchase.
As you can see, you have many options for financing the purchase of a business and you can utilize many alternatives in combination. Your VR Business Brokers of Fort Worth/Arlingtonbroker can work with you to determine your best options to bring about a successful business purchase that makes the most financial sense for your situation.