Small Business Financing

A lot of factors can determine how lenders will view your business deal. It will depend on the type of lender, type of business, and what kind of assets does the business own that can be used as collateral.

Is there real estate involved in the transaction and how clean are the financials of the business, can they verify financial claims with their tax returns?

A commercial banker or loan broker will show you what factors matter most and get your deal funded with their products.

Cash and Equity

Cash is King.  The nice thing about paying all-cash for a business is you limit your debt service.  You step right in and assume control of the business in a very strong position.  Having no mortgage or bank loan to pay takes a lot of weight off your shoulders as you get familiar with the business.

Another advantage of paying with cash is you can potentially negotiate a better asking price up-front.

Every business is unique and every business owner has their own motivations for selling.  

Do not feel that you will be able to get the business for pennies on the dollar just because you can close quickly.

Many deals are funded through lines of credit and equity in real estate.  Which is essentially the same as cash to a seller, but the factor of debt service comes into play and should be carefully considered when projecting new cash flow.

The down side of using all Cash to acquire the business is a matter of leverage.  Theoretically you can spread your cash across more investments if you combine debt capital with liquid capital.  The concept of OPM (other people's money) is not a new one and something to keep in mind when structuring your deal.

Bank Financing

The stories of a "no money down" deals and 90% seller financing are rare and I personally have never seen one.

When acquiring small business financing through a commercial lender, there is a good chance you'll need to put 20-40% capital of your own down on the business, financing the balance with debt capital.

You'll probably pay "prime + 2" in interest, meaning if the prime rate is 8%, you'll probably pay 10%).
The term of the loan will probably be 5-10 years. Many of the commercial loans I've seen are 7 year terms.

Business with Real Estate

If you are acquiring real estate in addition to the business, many lenders have products available known as "Blended Loans".

These business loans are "blended" with the standard "real estate loan" (10% down, 30 years).

You end up with roughly a 15% down payment, and a term of 18 - 22 years.

On the other hand, 15% of business and real estate can still be a sizable down payment for many.

The cost on the "blended loan" will likely be more favorable as well due to the the real estate being pledged as collateral.

Seller Financing

Most small business and mid-size companies will involve a portion of seller financing.

Seller financing serves two purposes:

1.  Funding the deal.
2.  The Seller shows his confidence that the business will continue to perform as the seller claims.

It is also common for seller financing to be amortized over a longer period of time and have a balloon after 2 or 3 years or so.  Generally the balloon will coincide with the projected period for the buyer to earn his "initial investment" back.