Buying a Business? Where’s the Cash?
You’ve identified a business, have a solid updated business plan, and lots of enthusiasm. The only thing missing is the money to get started.
Have a Business Plan
Make sure you’ve put some effort into drawing up a detailed business plan. By reviewing your plan, the potential lender can make an informed decision about lending you the money. It also gives the lender an opportunity to bring up any concerns and ask constructive questions that may help you fine-tune your plan.
Utilizing banks or finance companies is a good method of structuring the terms for acquiring a business. It allows the seller to exit risk free as they are no longer concerned about being paid. The choices are to obtain a loan back by the Small Business Administration (SBA) or to use a conventional loan. The process to approve a loan can be quite lengthy and require the borrower (and seller) to provide a significant amount of documentation about the business and about their personal financial situation.
A fairly common approach to financing a business acquisition is to provide the seller a down payment and for the seller to carry a note payable over a period of time. This adds significant risk to the seller, and thus they may require a number of covenants and a higher interest rate to offset the risks they are taking on.
You may have significant equity in your house that is easy to borrow from. But also consider the risks. This type of debt is secured by your home. You shouldn’t take on more debt than you can comfortably handle. Then consider the possibility that you may want to — or have to — sell your home some day. You’d have to pay off the balance(s) of your loan(s) at that time. In a declining real estate market, it’s possible your sales proceeds might be less than your loan balance(s). And, before agreeing to a variable rate loan, consider the potential effect of rising interest rates on your payments.
If traditional funding sources aren’t a viable option, you may want to consider asking a family member for a loan to help you with your start-up costs. Here are a few suggestions for keeping the transaction “professional.”
You can minimize conflict by putting your loan agreement in writing. Settle on an interest rate, and come up with a repayment schedule that you both agree on. Make the arrangement conform to standard business practices regarding late payments and fees. Following the rules of the loan agreement will separate it from your personal relationship with the lender.
Be certain that both you and the lender are clear about the role your relative will play in your business. If the lender has expertise that you would welcome, discuss parameters from the get-go.