When it comes to financing business purchase projects, three of the traditional approaches--home equity line of credit, business loan guaranteed under an SBA lending program and seller financing--continue to be popular.
Their frequency and manner of use however, have been changing with changes in the economy. A business buyer looking for cash to close a deal should be aware of the three funding methods and how best to use them.
1). Raising money with a home equity line of credit has become more difficult in light of the financial crises that occurred partly because this method of raising money was oversold by the industry, and misused by consumers. Many banks throughout the country have discontinued the practice of making money available to home owners secured by a second or third trust deed on the property. And those institutions still offering this type of lending have tightened the rules and imposed stricter guidelines and requirements. When investigating home equity loans as a source of funding for a business deal, the entrepreneur needs to look carefully at the terms. Also, it’s important to realize that leveraging home equity to get money for a business might discourage SBA-backed lenders from providing additional funding.
2) SBA 7(a) and 504 loan programs are more accessible now than they were at the height of the financing crisis. The entrepreneur seeking ways of financing business purchase deals now has more choices and a better chance getting approval for his loan application. The SBA has been aggressively promoting its lending programs, offering incentives, and boosting the ability of its lenders to enter into business purchase and expansion projects. But the rules for loan qualifying have become stricter and more specific. And a borrower needs to understand that lender circumstances often change; a bank that represented a good source at one time may lose its ability to satisfy new loan requests once it has committed its funds, altered lending criteria or loaded the pipeline with pending applications.
3). Seller financing remains the most popular way to get funds to complete a business purchase transaction. This source also is becoming more widely used as sellers realize they will have to offer to carry back part of the purchase price, secured by assets of the business, in order to achieve a sale at, or close to their requested price. Because seller financing often is used in connection with other methods of fund raising to buy a business, a buyer/borrower should become informed about how to structure the debt. If done incorrectly, it could eliminate the deal as a candidate for funding from an SBA-backed lender.
Financing business purchase opportunities is still largely a matter of relying on traditional funding sources. But because the lending environment has changed, a borrower needs to be educated about how and where to get the money and/or get the assistance of a business acquisition loan specialist.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement lan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.