Here are the primary methods:
Buyer Financing:
Some buyers may have the cash available to purchase the business. Some
may elect to use equity in their residence or other real estate. Others
may have other assets that they can sell or borrow against.
Bank Financing:
Banks may lend against a buyer's assets as described above. They may
also lend against the assets of the business, assuming there is sufficient
value to support the loan. The business will also have to make sense to
the bank, regardless of the asset value. In fairness to the banking
system, many of the figures supplied by business owners have very little
relationship to the actual earning power of the business.
Venture Capital Firms:
These firms do not, as a practice, lend to small or even many mid-size
businesses unless tremendous growth is anticipated. They also usually
expect an equity position in the company.
SBA Loans:
What is the SBA? The SBA is the United States Small Business Administration.
It that has been around since the 1950's. The 7a SBA
program allows customers to obtain financing for a variety of reasons
which includes business acquisition financing. This financing allows banks
to offer more favorable terms than are normally available. In fact, some
banks offer terms of up to 10 years with no balloon payment and no
prepayment penalties on these business acquisitions. In addition, business
acquisitions that include the commercial real estate can be financed for
longer fully amortizing terms.
SBA have become more popular. There is now some competition among lenders
for these loans. Many banks offer them, but the preferred SBA
lenders seem to have the upper-hand in both acceptance and service.
Other Sources:
This category includes family, friends. credit cards, and leasing
companies. Some suppliers have been known to assist in the financing of a
small business.
Seller Financing:
This is, by far, the largest source of financing available for the
purchase of a business. Many industry experts say about 90 percent of
small businesses sell with, or perhaps, because of, the seller financing a
good portion of the sale price. Buyers have much more confidence in the
decision to purchase a business when the seller is willing to assist in
the financing. The buyer has confidence that the seller believes that the
business will service the debt, in addition to providing a living wage.
(This information was taken from the Today's Business Scene newsletter
copyright 2001 Business Brokerage Press)
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