mistakes buyers make
Top Mistakes Buyers Make
April 6, 2017

Ways to Pay for a Business – 6 Helpful Tips

paying for a business

Planning to buy a business? Here are some basics that you will need to have and know, especially if you are looking to obtain funding from a third party or bank.

First, a good credit rating, with a credit score of 600 at a minimum, is needed to obtain a loan from a bank. If you don’t know your credit score, the internet provides many options to obtain a free report showing your scores. If your score needs to be improved, it can take months to get items corrected and removed if they are in error and much longer if there is a history of delinquent and/or slow payments. Credit scores are a key part of getting a loan. So if you are looking to buy a business in the future, you must be diligent in getting and keeping a good credit rating.

6 Helpful Things You Can Do To Help Pay For a Business:

  1. Limit the amount of taxes paid if 401k/IRA funds are used
  2. Establish the appropriate corporate structure to limit liability
  3. Develop a funding strategy to start or fund your business and its expansion
  4. Protect your personal assets not used for the business
  5. Establish a plan to exit your business and to minimize taxation
  6. Establish your budget for living expenses and source of money to cover them until the business is profitable.

What are Sources of Financing (depending on credit score)

  • Home Equity
  • 401K / IRA
  • SBA (Small Business Administration)
  • Owner of Existing Business
  • Credit Card Financing
  • Bank Lines of Credit
  • Bank Financing
  • Investors
  • Venture Capital
  • Family/Friends/ Relatives (OPM-Other Peoples’ Money)

Of these sources, the least likely to occur starts at the bottom of the list above and the ones that work start at the top of the list.

For almost all new business buyers, an SBA (Small Business Administration) loan is the only source of commercial lender financing. An SBA business loan is labeled a “7A” loan. They are typically obtained through commercial banks such as Wells Fargo, Chase, SunTrust and other regional banks. These banks offer SBA loans to new buyers because the government, through the Small Business Administration organization, guarantees that a significant portion of the bank’s loan will be paid in case there is a default on repayment of the loan. Not all banks offer 7A loans so it can be advisable to use a business advisor/broker or a group specialized in preparing business loans and sourcing them with lenders for new buyers (There is normally a fee associated with groups that provide this service but using them can avoid mistakes and save significant time and effort).

In summary, if you’re planning to buy a business, plan ahead! Start building equity through savings, home ownership and investments – work with a specialist. Get and maintain a good credit score.

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