How to Finance a Business Purchase
It is important to understand the ways to finance buying a business so you can determine the size of business you’re capable of buying.
It can be very difficult to get a bank loan for all the money you will need to buy a business. Banks need collateral and many businesses do not have the tangible assets that translate into collateral. Many business buyers turn to BDC for financing a business purchase, as they may be able to offer more liberal lending policies and flexible terms than a bank.
Other financing options:
- Combine bank financing with seller (vendor) financing. Be aware that the seller will probably not agree to finance you unless he or she sees that you are capable of turning a profit with the business.
- You can also try to buy the business on an earn-out basis, where some or even most of the purchase price is paid in the future, depending on certain targets being reached.
Many buyers assume that they can finance buying a business with a small down payment, just as they do when purchasing property. Buying a business is different. There are no rules about the size of down payments but it’s advisable to have at least 30 to 50% of the purchase price in cash, with the balance financed by the banks and/or the seller.