CEO at Tresle, a tech-enabled platform and M&A services firm that simplifies the transition of ownership for small to medium-sized companies, discusses various methods to finance the purchase of an established business. Cash, SBA 7(a) loans, conventional business loans, seller financing, and investors are all potential sources of financing that prospective buyers can explore. Each method has its pros and cons, and the best option will depend on individual circumstances such as credit score, industry experience, and the size of the transaction.
Cash is the simplest way to pay for an acquisition, but buyers often need to contribute at least 5% to 10% of the purchase price in cash, even if they can afford to pay the full amount upfront. SBA 7(a) loans are a popular choice for many small business transactions, as they offer good terms and a relatively low equity injection requirement. Conventional business loans are similar to SBA loans but lack the government backing, resulting in more variability in eligibility requirements and approval processes.
Seller financing is another option where the business’s original owner agrees to be paid for a portion of the purchase price over time. This can be a flexible alternative to traditional bank loans, and the terms are often negotiable between the buyer and seller. Investors can also provide financing through equity, although this may require giving up a portion of the business in exchange. However, securing investors can be challenging, especially for first-time buyers.
When deciding on a financing strategy, buyers should carefully research their options and develop a plan well in advance to ensure they have the necessary funding in place. A reliable financing strategy not only demonstrates affordability to sellers but also instills confidence in the buyer’s ability to close the sale. Consulting with a licensed professional for personalized advice is recommended, as each situation is unique and requires a tailored approach to financing a business acquisition.
