Unless you’ve found the needle-in-a-haystack buyer whose pockets are overflowing with cash, your buyer will need financing assistance to purchase your business. Though financing is ultimately the buyer’s responsibility, you may still play a significant role in securing funding. Here are some common funding options you should be prepared to talk about with you prospective buyers.
Common Ways to Fund a Business Purchase
To understand how you price your business will impact buyer financing, take a look at these common funding options, how they work and whether or not your pricing strategy will impact the buyer’s ability to obtain funding.
If your buyer is utilizing seller financing, you’ll be heavily involved in the process. And there’s a good chance this will be the case — a surprising amount of existing business purchases (around 60 to 90 percent) involve some amount of seller financing.
Seller financing is very similar to a bank loan, but the seller holds the note for the loan, and the buyer makes payments with interest to the seller. The lending process mirrors a bank loan in that the borrower presents a business plan and makes a significant down payment. While there is some risk to the seller holding the loan note, the business serves as collateral for the loan.
The potential to make additional money from the sale in the form of interest payments is beneficial to the seller, but that’s not the only perk. Offering seller financing is a great way to get top dollar for your business and close the sale faster.
Seller financing scenarios can look different depending on the needs of both the seller and the buyer. When deciding if it’s a good choice for you, answer these questions before moving forward:
- Are you willing to stay connected to the business? Offering seller financing means not completely cutting ties with the business you’re selling.
- Will I stay on as an advisor? In many cases, the seller stays on to support the new business owner as an advisor during a transition period.
- Do I need a lump sum of money? If you need a lump sum of money when selling your business, seller financing isn’t a good choice for you since payments will be made over several years.
Finally, it’s important to note that seller financing can be combined with other financing methods. For example, if a buyer qualifies for an SBA loan or has obtained ROBS funding, but the amount doesn’t cover the full cost of the business, you can then offer seller financing for the remaining amount.
Rollover for Business Start-ups (ROBS)
Potential buyers can use money from their retirement account as a tax- and penalty-free transaction through a Rollovers for Business Start-ups (ROBS) arrangement.
ROBS allows individuals with rollable retirement funds to use that money to finance a small business, whether it’s a start-up or the purchase of an existing business or franchise. Here’s an overview of how ROBS funding works:
For an in-depth look at ROBS funding, also known as 401(k) business financing, take a look at our guide: The Complete Guide to 401(k) Business Financing: Rollover for Business Start-ups.
Loans from the Small Business Administration (SBA) are a tried and trusted form of small business financing. Though the SBA doesn’t fund the loan directly, they encourage banks to lend to small business owners with favorable financing terms by guaranteeing up to 80 percent of the loan. While banks offer a variety of SBA loans, in general borrowers can qualify for up to $5 million in small business financing with low interest rates and long repayment terms.
Qualifying for and obtaining an SBA loan is no small feat. It can take several months for funding to close so it’s important to know it may not be a fast transaction selling your business to an SBA funded buyer. The good news is that buyers who qualify for SBA funding likely have a solid business plan in place and a significant down payment to invest when buying your business.
As a seller, you’ll want to keep in mind that the SBA has specific requirements when the borrower is purchasing an existing business. Their debt-service coverage ratio (DSCR) stipulation requires that applicants seeking greater than $350,000 in funding must be buying a business with a DSCR of equal or greater than 1.15. If your business doesn’t meet this requirement, it could disqualify potential borrowers from using SBA funding.
If you’re interested in learning more about SBA funding, see The Complete Guide to SBA Loans.
Also known as credit card financing, unsecured loans offer potential business owners up to $150,000 in funding. Unsecured loans are not backed by collateral like traditional business loans. Though it’s unlikely a regular credit card company will approve a six-figure credit card, there’s an exception for those seeking small business financing.
Unsecured loans are obtained in partnership with a specialized provider who finds credit cards with high balances, no cash advance fees, and no interest payments for the first year. The third-party firm then applies for and liquidates the credit cards on the borrower’s behalf. The result is an infusion of cash with no limitations on the type of business expense it can be spent on. Approval is based entirely on the borrower’s credit score, with a minimum credit score of 690 and funding ranging from $10,000 to $150,000.
If your business has a strong cash flow that’s likely to allow someone to make repayments in a short amount of time, an unsecured loan could be an option for your buyer. In any case, if a borrower feels confident they can repay the loan before interest jumps they may turn to credit card financing.
Another lesser-known form of collateral-based financing for small business owners is a portfolio loan, also known as a Securities Backed Line of Credit (SBLOC). Portfolio loans are available to borrowers who have at least $85,000 in securities in an investment portfolio, which trade at $5 per share or higher.
There are many benefits for entrepreneurs who have the option to borrow against their portfolio. These loans have very low interest rates, which typically range from 2 to 5 percent. Additionally, the qualification process is relatively straight forward, without much consideration for credit score, if the asset requirements are met. Helpfully, liquidating shares is not a requirement for the arrangement. Borrowers should keep in mind that because their portfolio value is held as collateral for the loan, this means that if the market falls and the value of the portfolio decreases, the lender can require additional collateral.
Additional Small Business Financing Resources
Whether you’re interested in learning how pricing your business will impact potential buyers or you want to learn more about financing options for your next small business project, you can read in our complete guide: Small Business Funding Options.
Potential buyers can also learn how much small business financing they’re eligible for in a matter of minutes by pre-qualifying online. Complete the pre-qualification process here.