Financing Options

There are many circumstances that Seller financing might be the right choice for a Buyer and Seller.

• Seller financing greatly increases the chances that a transaction will be successful.
• Seller financing offers reduced paperwork
• Seller financing offers  reduced approval times,
• With Seller financing terms can be structured to fit the transaction.
•  Sellers can structure the note and receive significant tax savings

When a Seller offers financing to a buyer, the buyer can feel good about the Seller's confidence in them and the viability of the business to service the debt.  Sellers will require a personal guarantee from the Buyer and retain a security interest in all of the business assets transferred. One drawback to Seller financing is that Sellers will typically require a much higher down payment and a shorter repayment time than most lenders. Sometimes Seller financing can be combined with other types of financing. When this occurs, however, Seller notes are usually subordinated or secondary to the other financing which makes many Sellers reluctant to finance a large portion of the purchase. There are a variety of ways to structure a seller financed deal that makes since for both buyer and seller. Deal structuring and financing is an area where your VR Professional Business Intermediary can be of service.

SBA Loans for the purchase of a business are based on the cash flow of the business as reflected on the tax returns for the last 3 years. Owner’s salary is added back as well as some other allowed expenses. Depreciation, Amortization and Interest are also added back to determine how much the SBA will finance the business for.

SBA financing benefits:

• Qualification based on business assets and cash flow
• Lower Down payment for Buyer, Smaller Note for Seller.
• Typical Loan terms for the Buyer 10 years.

Many local, regional, and national lenders offer business acquisition loans that are guaranteed by the Small Business Administration (SBA). If you are considering SBA financing, you should always look for a lender with SBA preferred status. This is your assurance that the lender routinely does these types of transactions and can readily obtain approval from the SBA for your loan. SBA loans require many different fees including packaging fees, loan guarantee fees, appraisal fees and others. These fees can add up to 2-4% of the loan's value; often these costs can be added back to the loan amount. Depending on the structure of the transaction, down payments on SBA loans are between 10-30% of the transaction value. Most transactions however, fall into the 20-30% down payment range. SBA loans require personal guarantees, security interests in the business assets, and most SBA lenders will require real property collateral in addition to the business assets collateral.

Business Buyers have also used the Equity in their home to buy a business.  The term for a Home Equity Loan is typically longer than a SBA Loan, and the fees are typically less.  Buyers will opt to finance the entire purchase of the business with their home equity loan or ask the Seller to carry a note.  Buyers feel more confident in Sellers who are willing to carry part of the financing and Sellers are more willing to provide some financing for the business when the Seller’s note is in first position.  The Sellers will still usually require the personal guarantee of the buyers and an interest in the business assets.

Using Retirement Funds as Business Capital

Money in IRAs and 401(k) plans can be used to finance the purchase of a business.

An ERSOP Plan provides a simple process to invest retirement funds in a new or established business without distributions, penalties and taxes. Anyone with a qualifying retirement plan has a ready source of capital for financing their business.

Instead of investing in the stock of other businesses you will be investing in the stock of your own business.

Capital for the investment in your own business can be obtained from the following types of retirement savings plan: 

IRAs, 401(k) Plans,403(b) Plans, SEPs, SIMPLE Plans, Annuity Plans, Profit Sharing Plans, Defined Benefit Plans,457 Plans (govt. only), Cash Balance Plans, Money Purchase Plans, Rollover Plans ESOPs

For larger Transactions over $2,000,000 there will be a need for some type of Mezzanine financing, through Venture Capitalists, Private Equity Groups (PEG’s) Angel Investors or other types of Investment Capital.