One of the most important requirements when you buy a business is raising capital, which will require you to prepare a well-thought-out business plan. This is vital not only for when you are using capital to buy a business but also for budgeting initial operating expenses. Additionally, a business plan will help creditors to determine the maximum amount and terms of financing that will be made available to you.
CHOOSING THE RIGHT FINANCING OPTIONS
Since most financial institutions only provide 80 to 90 percent of your buying a business, many business owners have to use a combination of different sources to raise the needed capital.
These options range from simple to complicated and sophisticated, but can be mashed together for you as the business owner to achieve the maximum capital at the lowest cost to buy a business:
- SBA Loan (Small Business Administration) – The SBA offers a wide variety of programs, including loans from $5,000 to $2,000,000.
- Seller Financing – This is often available by just asking the seller for terms.
- Commercial Loan – Available at a bank or finance company. These loans usually require a personal guarantee, collateral and a well-prepared business plan.
- Economic Development Programs – Check with state and local governments for details. This can be a very creative, beneficial and low cost source of capital.
- Venture Capital – This source of capital will look closely at the business as well as the buyer’s history and plan. Venture capitalists will expect a percentage of ownership in the new business in return for providing the necessary capital. Look for venture capital in local market areas.
- Loans from family members or friends - These funds usually can be acquired with little or no interest at all, depending upon who your family and friends are.
- Personal Checking, Savings and Securities Accounts – These funds are withdrawn directly from personal liquid assets.
- Sale of an Asset – Simply put: sell something – real estate, a car, a boat, an antique, a collection, etc.
- Loans against a Checking or Savings Account – This will often be in the form of overdraft protection or a credit card.
- Loans against Securities or Retirement Accounts (IRA, 401K, etc.) - Terms on these loans vary greatly, which detailed information on these can be provided by account representatives.
- Loans against Life Insurance Policies – Customer service departments from life insurance carriers will be able to provide detailed information regarding this option.
- Credit Card Cash Advances – Those customer service departments will provide details on this option.
- Personal Lines of Credit – These are typically available at local banks and finance institutions.
- Home Equity Loans – Take equity out of a residential property. Interest on these loans is often tax deductible. Local mortgage companies and banks have more information.
- Refinance Real Estate Taking Cash-Out – Interest on these loans is often tax deductible. Contact your local mortgage companies for further details.
- Finance an Asset – Take cash out of an asset by financing it – boat, car, collection, antique, etc. Consult a local bank or finance institution to inquire.
- Angels – These wealthy individuals enjoy investing in small businesses. Angels will require a sound business plan and a speedy, healthy return. Look for angel investors in local market areas. About a quarter million angels are investing $120 billion a year in more a 30,000 companies.
- Factors – These are businesses that buy receivables. When buying a business with outstanding receivables from reliable payers, a factor would consider pre-paying those receivables in exchange for 100% of the receivable when they are paid.
- Floor Planning – These are asset-based loans that allow companies to finance their inventories. The inventory is purchased as collateral until it is sold. Consider this alternative if the business being purchased has significant inventory.
- Small Company Offering Registration (SCOR) – This is a simplified means of selling common stock to the public over the counter rather than having to follow more stringent IPO restrictions. SCOR’s must follow SEC regulations.