Only a limited number of methods exist to finance the purchase of a business, and few business sales are handled on an all-cash basis.

So it may not be easy, but there are some major, proven means under which a small business can be financed. Keep in mind that a professional business broker can answer your questions about financing the sale of a business.

Buyer financing - Buyers may have cash available to purchase a business. Some may elect to use equity in their home or other real estate. Others may sell or borrow against assets. However, the number of all cash transactions on businesses priced over $100,000 is minimal. A certain amount paid and a certain amount per month is part of the American tradition. And buyers like to know a business can support them and pay itself off with profits.

Banks - Banks may lend against the buyer’s assets. They may also lend against the assets of the business, assuming they’re sufficient to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by sellers have little relationship to the business’ earning power. If the business isn’t successful, the bank would be left only with hard assets and no way, except by auction, to liquidate them, and banks aren’t in business to liquidate furniture, fixtures and equipment (FF&E) of businesses.

Venture Capital Firms - As a practice, these firms don’t lend to small or mid-size businesses unless tremendous growth is expected. They also expect a piece of business ownership.

SBA Loans - SBA loans have been gaining popularity and now competition exists among lenders for these loans. Many banks offer them, but large non-bank companies have the upper hand in service and acceptance rates. But still, less than 5% of businesses sold are financed by the SBA, either directly or on an SBA-guaranteed basis.

Other Sources - This category consists of family, friends, credit cards, leasing companies, etc. Credit cards (surprise!) are the biggest source of small business financing.

Seller Financing - Seller financing is the largest source of available financing for purchasing a business. Industry experts report at least 90% of small businesses sell with, or perhaps because of, the seller financing as a good portion of the sale price. This portion is usually 50% or more, financed over 5 to 10 years.

Buyers want their purchased business to pay for itself. Sellers demanding all cash alerts them to possible trouble. Is the seller saying the business can’t support debt or does he or she just want to get out of a bad business? The financing process slows the transaction down and provides time for buyers to feel confident that a good decision is being made.

As a potential seller, don’t discount the value of a business broker’s services. Brokers stay educated on buyer-seller issues and they’re the best source of information on financing the sale of a business.

Nancy Cofield is president/broker with Corporate Investment
International of North Florida, Inc. She can be reached at
996-1666 or ncofield@corporateinvestment.org.