Alternative Financing Options for Business Acquisitions

Many people dream of owning their own business. However, in recent years, traditional bank financing has been increasingly difficult to obtain; and this has been a roadblock for numerous would-be entrepreneurs. If your goal is to start or acquire a business in the New Year, several financing options are available to help you achieve your dream.

Bank Financing: Before looking at other options, it is useful to find out if you have a chance to qualify for financing through a traditional bank. Here are the general requirements a bank will look for:

  • Having a FICO (credit score) of 650 or higher.
  • A capital investment on your part of at least 10% of the value of the business.
  • A strong balance sheet (for existing businesses); this means positive cash flow, high asset values, low debt, etc.
  • The better established a current business is, the greater the chances of being approved.

If you lack these basic qualifications, it may be wise to look for creative alternatives to traditional financing. Here are some alternative financing methods to consider:

Small Business Administration: A Small Business Administration (SBA) loan can be obtained through numerous participating banks. They are a good option if you are looking to buy a business with a strong track record such as being in business at least two years with a positive balance sheet. Most SBA loans take up to 90 days for approval and the minimum loan amount is $150,000. Clearly, these loans are not for everyone; but for those who fit SBA criteria, this can be one of the best available financing sources.

Friends and Family: If you have friends or family members with the capital to back your business venture, this can be a great option. For one thing, they already know you personally, so they are unlikely to need a credit check. Also, the terms and conditions of a family loan are likely to be more favorable. Of course, the downside is the possible strain it can put on relationships; especially if your business fails to pan out. To help alleviate this concern, it is best to put everything in writing. Have an attorney draw up a contract and make everything legal so you have a set payment plan and a legal obligation to repay the loan.

Home Equity Loans: If family or friends lack the finances or inclination to help, maybe you can borrow the money personally. It is possible that you have several thousand dollars of equity built up in your home; though this is less likely than in the early 2000s. However, if you do have some equity and can qualify, a home equity loan could be a good option because the rates are low and the interest is tax deductible.

While we are on the subject of personal loans, it is worth mentioning that you may be able to obtain an unsecured loan from the bank and/or take cash advances from your credit cards. This option may be able to provide the funding to buy/start your business, but it is not recommended because of the unfavorable terms and conditions. Use this only as a last resort (if at all).

Angel Investors: If you have ever watched Shark Tank, you know what Angel investors are. These are affluent folks that provide capital for businesses in exchange for an ownership share. Usually they do not want control of the company, just the opportunity to cash in down the road if your business grows and prospers. Before approaching a wealthy investor to back your business, make sure you have all your ducks in a row and be ready for lots of tough questions.

Crowdfunding: Since the Jumpstart Our Business Startups (JOBS) Act of 2012, crowdfunding has gone mainstream. This method allows businesses to list on one of several crowdfunding sites; such as Kickstarter, Idiegogo, Crowdrise, and many others. If the business model is solid, the “crowd” will help you fund it. Many new startups have achieved their financing goals by leveraging the power of crowdfunding.

Speak to a Local Business Broker: This is by no means an exhaustive list of business financing options; there are many others out there that may help you realize your entrepreneurial dreams. Business brokers are the best people to talk with to learn all the latest methods people are using to successfully finance their businesses. A business intermediary can also help arrange seller financing in many cases, allowing you to make payments directly to the party you are buying the business from.

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