How to Obtain Financing to Buy a Business
Obtaining a bank loan can be a long, drawn-out process. For banks, small-dollar loans aren’t economical, and therefore, aren’t worth the time or hassle. Because of this, many entrepreneurs have started their businesses with: savings, credit cards and/or loans from family and friends. But if any of those were an option for you, you wouldn’t be reading this, right?
Chances are, you’ve already inquired about and are unable to secure a bank loan. So what are your options? There are a few other non-bank lending options including:
Seller Financing
Because traditional lenders simply aren’t lending, a popular choice has become seller financing — a win-win for both buyer and seller, and probably your best bet. Seller financing is when the seller of a business provides a loan to the new buyer to cover a portion of the purchase price.
Let’s say the sale price for a business is $500,000. A seller financing deal would require a down payment of $200,000 from the buyer, and $300,000 in owner financing. The terms of the loan payment are generally quite flexible and can vary greatly, but typically are 3-7 years with interest rates ranging from 6-10%. Obviously, the seller wants to make the most money possible, but it isn’t beneficial to have unrealistic terms that could lead to a default. If seller financing is an option for you, take it!
Online Lending
Former Treasury Secretary Larry Summers predicts that online lenders could eventually capture upwards of 70 percent of the small business sector. That’s good news for business owners like you.
For borrowers, the process couldn’t be easier. Just fill out an online application that generally takes less than an hour to complete. Within hours, the lender will send you a response – and you can be funded within a matter of days.
We’ve put together a small list of online lenders that are eager to come to your aid. While they may have a different business model, they’re all eyeing the same market: small loans of four to six figures that banks and traditional lenders don’t have time or patience for. It’ll be interesting to see how the banks respond to the rise of online lending, but while the banks sweat it out, utilize online lending to your advantage. They’re here to help.
Fundbox offers business owners a simple way to fix cash flow by advancing payments for outstanding invoices.
BlueVine also advances funds against invoices and helps business owners streamline their cash flow.
Kabbage gives you the security of working capital whenever you need it. Draw against your line of credit, as often as once a day, for anything you need to grow your business.
OnDeck delivers true small business financing solutions using OnDeck Score technology, which focuses on the health of the business – not just a personal credit score.
LendingClub offers small business loans up to $300,000 with low fixed rates starting at 5.9%.
Retirement Fund
Dipping into your retirement fund is an option, but a risky one and should only be considered as a source only if all others sources have been tried. According to government’s ERISA law, you can invest your existing IRA or 401(k) funds to the purchase of a business without taking an early distribution and incurring penalties. However, during the time of the loan, any money borrowed from your 401(k) isn’t earning interest along with the remaining balance. Something to keep in mind.
While these are just a few ideas, there are more out there. Lucky for you, today’s entrepreneurs have a wide range of non-bank financing options. Find the one that works for you and realize your dreams of owning your own business.