Financing a Business Acquisition

Some business purchases are completed as all cash purchases. Generally the business purchaser is going to want to finance the purchase through a third party lender or, if the seller is interested, owner financing. Sometimes a combination of cash down payment, third party bank financing and some seller financing are used to complete a transaction.

Having a reasonable down payment is basically essential to do any business purchase as well as good credit if a bank loan is going to be obtained. The level of down payment required can be as little as 10% of the acquisition price of the transaction if an SBA loan is being used and there is real estate in the deal. For SBA loans on businesses without real estate the down payments usually range from 15 to 25% of the cost of the acquisition. It should be noted that SBA lenders allow the purchaser to roll the closing costs into the loan as well as providing additional working capital to the purchaser. This can mean that the actual out of pocket cash outlay can be minimal. SBA loans are generally to between 10 and 25 years with the longer loans being those with real estate involved. The interest rates generally run 2 ½ to 2 ¾ percent above prime rate and are at the discretion of the lender. It should also be noted that the Small Business Administration does not make any loans. They provide a guarantee program to protect lenders against loss in the event of a default which encourages lenders to make these loans.

Sometimes purchasers borrow from investment brokers using securities as collateral or borrow against real estate they own to purchase a business. This can be from a local bank or a loan source that is satisfied with the collateral offered.

On occasion the business owner is willing to finance the transaction as the first lienholder. Generally the down payment level is between 25 and 50% down and the seller may amortize over a longer period but want a payoff within 3 or 5 years at which time the purchaser can get another loan if they want.

Sellers sometimes hold a small second lien behind a bank to help the purchaser who does not have a large enough down payment.

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