If you’re an aspiring business owner who needs to raise finance for a business purchase, you have several options. Three of these are bank lending, an angel investment or seller financing.
Here’s what you need to know about each of these options, as told by Matthew Hernon, an Account Manager at BusinessesForSale.com.
Banks are the traditional choice for business lending. A bank loan can often be the cheapest way to acquire business finance. However, as you may suspect, they have rigorous application criteria you will be expected to meet.
If you qualify, you are likely to secure a competitive interest rate with fixed monthly payments as well as dedicated support for your business. But to achieve this you will need:
- A robust credit record
- Loan collateral
- And be prepared for a complex and lengthy application procedure.
A critical aspect of your application will be your own experience of the sector. In most cases, this type of loan will only be available if you are wanting to buy an established business with a healthy cash flow and well-organised finances.
A bank will wish to know precisely what the loan is for. So you need to provide extensive details of the finances of the business that you are purchasing. You will also need to have a clear business plan demonstrating what you intend for the business.
The assessment of your credit record will be forensic. A bank will need to assess how much the business you want to buy is earning and what its current debt position is.
Angel investors are wealthy individuals prepared to invest in start-ups or early stage businesses, either alone or in a consortium. An angel will want a share in your business equity in return for their investment but may well be prepared to take a longer-term view of any finance arrangement than a bank would.
Some angel investors will be happy to remain detached from your business, but others may want a seat on the board. There are some angel investors that will even want some involvement in the running of your business.
A large part of the attraction is often the expertise, industry connections and all-around business acumen that the angel investor can offer. Nevertheless, these ‘angels’ are ultra-pragmatic investors and their own due diligence is so thorough that many funding applications are turned down.
However, many businesses initially denied angel funding describe the whole experience as a great opportunity to learn and build connections. As a result, many report that they have either been successful in acquiring angel funding further down the line or the process has helped them secure funds from other sources.
Angels show a marked preference for certain kinds of small business investment; typically, ideas which encapsulate something of the ever-changing ‘spirit of the age’.
It will be no surprise to hear that the likes of Uber, Innocent Smoothies and Amazon have all benefited from angel funding at some point in their development.
The third source of business funding involves negotiating an element of seller financing as part of a deal to acquire an established business. You may agree to pay 75% of the seller’s asking price outright and fix up a seller-financed deal to repay the remaining 25% on credit terms over an agreed loan period.
Whilst this may help bridge the gap if you can’t quite manage the full sale price, many entrepreneurs consider seller finance for more strategic reasons.
In some cases, a buyer not ready to agree to a high price may be happy to see the difference financed via the seller. This gives the former owner a stake in the future of the business. Therefore, it effectively requires the owner to see the business is handed over in good health – even if only to guarantee the loan will be repaid!
A seller-financing arrangement concerns only the contracting parties. However, each side will still wish to conduct thorough due diligence to protect their own interests. And in addition, as a prospective buyer, you should have a lawyer on your team to oversee the legal commitments.
Note too that the seller will still want to see a professional business plan. They will also wish to verify your credit status just as thoroughly as any other lender.