Business Financing

When selling a business, consider offering seller financing, as it increases the chances of a sale. This option attracts buyers who may lack full cash but can manage a 30-40% down payment. An all-cash requirement can raise suspicions about the business's condition. Seller financing boosts buyer confidence in the business’s success and aligns with cultural norms of making purchases in terms, especially when institutional financing isn't available.

Private equity (PE) and venture capital (VC) investors seek high returns through equity investments, typically buying common or convertible preferred stock, focusing on significant capital appreciation. Their investments are risky, often subordinated to debt, which can lead to total loss but also substantial gains. In contrast, mezz lending involves safer debt securities with an equity kicker. Mezz lenders focus on interest yield, while PE/VC prioritize equity growth.

Banks aim to profit from loans, not offer charity, so they evaluate borrowers through the five C’s of credit. **Capacity** assesses the ability to repay based on cash flow and payment history. **Capital** reflects personal investment and risk in the business. **Collateral** includes assets that secure the loan. A **Guarantee** involves a third party promising repayment if the borrower defaults, while **Conditions** refer to the loan's intended use. Lastly, **Character** considers the borrower's trustworthiness.

Seller financing can be a powerful tool for closing business sales, especially in challenging economic conditions. It allows buyers and sellers to negotiate favorable terms, reducing closing costs and providing opportunities for special purchase conditions. Promissory notes generated through seller financing can become liquid assets for sellers, enabling them to access immediate cash for new ventures. Additionally, past clients who benefited from seller financing can lead to new buyer opportunities, ultimately resulting in increased closings and commissions.

The growing reliance on credit scoring has significantly aided entrepreneurs in securing financing, with an estimated 85% of lenders incorporating it into their processes. A credit score, ranging from 400 to 900, predicts a borrower's repayment likelihood based on factors like payment history and credit amount, excluding demographic details. While lower scores can still lead to loan approvals after detailed reviews, various support programs exist to help consumers with credit challenges, highlighting both the impartiality and potential drawbacks of credit scoring.

Private equity and venture capital are often confused, but they serve different purposes in business financing. Venture capital involves investing in high-risk, high-reward startups, while private equity focuses on purchasing equity in private or public companies to make them private. Only a third of private equity funds qualify as venture capital. Investors seek significant returns, often around 35%, despite high risks and a low success rate. Consulting a VR business intermediary is advisable for navigating these investments.