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Q&A: Buying A Business – Financing Options

Q.  I want to buy a business. What type of financing is available to me, and how are such deals structured?

A. Financing is available through the Seller, a bank or the Buyer’s personal resources (i.e., family). Seller financing is usually cheapest and easiest to procure. Furthermore, it indicates to the Buyer that the Seller has confidence that the business will succeed. Additionally, loan fees don’t exist and the interest rate is usually lower than banks. The term, however, will often be shorter. Securing financing through the Seller is the most common business financing.

Banks will finance the purchase if the business has a solid financial foundation (i.e., strong earnings). Banks will require a lot of paperwork and documentation. Fees will be charged upfront to administer the loan to the Buyer. Bank loans have become increasingly popular and more available in recent years.

Family is also a source of financing. Financing is ultimately up to the buyer, but there are obviously a lot of issues that come along with financing through a family member. There are many benefits, but you must weigh those benefits with the negatives.

The down payment varies depending on the type of Buyer, the Seller’s circumstances and the Buyer’s ability to put a payment down. A down payment will drive the sale of the business and can range from 15% to 50%. In most cases, the larger the down payment offered the Seller, the lower the total price.

However, the Seller will understand that a Buyer must keep some cash available for operations once the business is sold. Sellers prefer to receive all cash at closing. Finally, placing a down payment shows commitment to the lender because there is a vested financial interest in the success of the business.

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