How to Finance a Business Purchase Without Collateral
Many people want to be in business for themselves, but they do not have any collateral to secure a business loan. This may not be as much of an issue if you are starting a business from scratch. Many businesses, particularly those that can be operated from a home office, can be started for just a few hundred dollars or more. Going into business this way can be a long trek before you reach profitability, however. Usually, you will need to have another job to make ends meet while you build your startup on the side.
For those who want to skip the startup phase and get into a business that will pay an immediate return, it makes sense to shop around for an established business to buy. The challenge, of course, with businesses that are already profitable is they will cost a lot more money to get into. For most people, this means they will need to finance a large portion of the purchase.
If you have no personal collateral, this can make it difficult to get a bank loan for certain businesses that do not have many tangible assets of value. A good example of this is an accounting firm. Typically, the main asset of the accounting firm is their clientele, and oftentimes, the owner’s established relationship with clients is critical to keeping them. In such cases, the bank might not want to finance the purchase unless you have a home or another personal asset you can put up to provide extra security.
Financing a Business Purchase when you Have No Collateral: One of the best ways to get a loan to buy a business without collateral is through the Small Business Administration (SBA) 7(a) Program. The SBA does not look mainly at tangible collateral when determining qualifications for a loan. They consider other factors, such as business cashflow, creditworthiness of the buyer, and the buyer’s experience and knowledge of the industry. Qualified buyers can often finance between 75% and 85% of the purchase price of a business through an SBA loan.
This, of course, means that you will need to come up with a down payment of 15% to 25% on your own. One possible way to do this with very little money out-of-pocket is through seller financing. You could ask the seller to finance whatever percentage of the purchase the SBA loan did not cover. Some sellers are open to this option, especially if they like you and you seem to have the necessary experience and expertise to keep the business profitable.
Keep in mind, however, that when a seller finances all or part of a purchase, they have a major vested interest in your success. This means they are likely to perform full due diligence and make sure you are fully vetted before they agree to this type of deal. On the positive side, if the seller does agree to fully or partially self-finance, they will be far more motivated to help you maintain a successful operation. They may stay on to consult with you, or they might even work there part-time, especially if their presence is an important factor in keeping customers/clients.
The combination of an SBA 7(a) loan and seller financing can be quite powerful, allowing buyers with no collateral and very little liquid capital to purchase a business. If one of these two options are not available for whatever reason, there are some alternatives you can explore:
- Take on a Partner: If you are short the down payment and the seller will not finance, you could find an investor (or investors) to partner with you to cover the funds you need. The SBA requires anyone who owns 20% or more of the business to be a co-signer on the loan and become personally liable. If you or your investors are concerned about this, you may want to take on two or three partners, so no one partner reaches this threshold.
- Start a Crowdfunding Campaign: Kickstarter and other crowdfunding sites provide platforms for aspiring entrepreneurs to raise money to start or expand a business. This option is typically more successful with startups that have a cool new product or service rather than for the purchase of an existing business, but it’s worth a try if you have limited options.
- Loan Money from Family and Friends: The last resort for many people is to go to a family member or friend to loan the money for a business or take them on as an investor. This option should be explored carefully as money owed between loved ones can create strained relationships. For some people, however, the help of family and friends might be a lifesaver if there are no other alternatives.
- Use your Retirement Account to Secure a Loan: One last alternative to throw in here is a loan against your IRA or 401K. Clearly, this is not a “no collateral” option, but a lot of aspiring entrepreneurs forget that they have a retirement account that could be leveraged to get them into the business they want. Loans secured by an IRA or 401K can work very well in some cases, especially when there is a sizable amount available in the account.
Speak with an Experienced Business Intermediary for more Details: Purchasing a business is a complicated process. Financing is just one of the pieces to a larger puzzle, and there are many other steps that must be taken to successfully complete the deal and become a business owner. When you begin your search for a business to buy, it is best to work with a reputable business broker. A business intermediary has access to the widest pool of available listings, and they know some of the sellers personally. They can filter through their listings to find the right businesses to match your criteria. They can also help you develop a financing strategy (based on your financial situation) and help guide you through all the other important steps in the process.