Can You Buy a Business Without Collateral
It’s a new year, and you may be thinking that this is the time for you to finally fulfill your dream of becoming an entrepreneur. But there is just one problem; you do not have the capital available to get started. You might be able to start a low overhead business from scratch, but you prefer to buy a business that is already established and generating enough income to provide the standard of living you want to enjoy.
If you do not have the capital available and you do not have sufficient collateral, is there any way to purchase the type of business you want? The answer to this question is “yes”, but it might require some creativity, and it is not possible in every circumstance.
Here are some of the ways that an aspiring entrepreneur can buy a business without collateral:
- Small Business Association (SBA) Loans: The SBA has a number of different loan programs that are designed to help buyers who might not otherwise qualify. For example, the SBA 7(a) loan program guarantees 75% of a business loan a bank makes to a borrower. This allows eligible buyers to finance up to 75% without collateral. They do have to come up with the other 25%, but it does not have to be their own money. It can come from investors, gifts, or other legal sources.
- Seller Financing: One little-known fact about business purchases is that a significant percentage of sellers are willing to provide some level of financing to the right buyer. For example, if you qualify for an SBA loan for 75% of the purchase price, the seller might finance the other 25%. For a seller to agree to this, they will need to be convinced that you are capable of successfully operating the business since they will have a vested interest in your success.
- Private and Alternative Lenders: If you have very little capital but an excellent credit score, you might be able to get a business loan from a private financier or alternative lender. For example, there are several online peer-to-peer lending platforms that provide loans to individuals and small business borrowers. These loans are backed by investors, and you will probably need a credit score that is above 700 to qualify. Again, you could combine a peer-to-peer loan with seller financing to secure financing with no collateral.
- Loans or Investments from Family and Friends: Maybe you know someone in your family or in your circle of friends who has the capital to purchase your business. Since they know you and your character, they might be willing to take a chance on you. This could be a loan from a family member or friend, or you could make them an investor in the business. One word of caution, however. Loaning money from people you know can negatively affect relationships, especially if things do not go as planned. So, consider this option carefully and weigh all of these factors before you proceed.
Don’t Forget About your Retirement Account: If you believe that you do not have collateral to buy a business, there is one source you might be overlooking. Do you have an IRA or 401(k) with a value in the high five figures or exceeding six figures? If so, you might be able to use it as collateral to secure a business loan.
Many people are understandably hesitant to touch their retirement account; and cashing it out directly before you are allowed to will incur a tax penalty. But taking a loan against the value of your retirement account is a completely different approach. Of course, this option does involve risk as you could lose everything you borrow if your business venture does not work out. But this is a viable option nonetheless, and you will need to decide whether it is right for you based on your risk tolerance.
Speak with a Local Business Broker for Help with Available Businesses and Financing: Buying a business without collateral is difficult, but it is not impossible. With some persistence and creativity, you might be able to put together the financing you need. For further help with available business listings in your area and financing options, seek advice from an experienced business broker. Business brokers handle these types of transactions on a regular basis, and they have an in-depth understanding of the various strategies that buyers have used to successfully finance their business purchase.