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HOW TO FINANCE THE PURCHASE OF A BUSINESS

February 27, 2020 10:09 pm Published by Leave your thoughts

Buying a business?… Many entrepreneurs choose to buy an existing business rather than start one from scratch.

There are many benefits to buying an existing business. You’ll already have an established customer base, knowledgeable employees and reliable cash flow.

Financing the purchase of an existing business is different from financing a new business. Because an existing business already has a track record of success, it’s often easier to get funding for this type of investment than for a brand-new startup. To determine which financing method is right for you, you’ll want to consider how much you’re willing to both invest and risk, and what makes most sense for you and your acquired business. If the company has a decent track record and you have an impressive credit history, for instance, you might apply for a bank or SBA Funding. You may consider the following sources of financing.

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Top 7 Funding Options for Buying an Established Business:

  • Personal funds: If you have a ton of money saved up, perhaps in preparation for this type of transaction, then you should consider digging into your savings. However, this arrangement might require additional support, like from that of a bank or SBA funding.
  • Seller financing: Often, the person selling you their business will funding you money that you can pay back over time, typically using the profits you make off the business. This helps ease the transition without draining your bank account.
  • Bank funding and Credit union funding: Traditional bank funding can be hard to attain, especially for a business acquisition. Unless the existing company has substantial assets, and you have a great credit score and track record, you likely won’t score this financing on your own.
  • SBA funding: This is your best shot at getting a bank funding. An SBA 7A funding “provides guarantees and safety measures for banks who, in turn, can funding money to fund acquisitions,” writes Commercial Capital. The guidelines are typically minimal, though the bank can add its own.
  • Leveraged buyout: Ultimately, this involves leveraging some of the business’s assets to help fund the acquisition. This is rarely the only form of funding, however, and often involves funding or seller financing in addition.
  • Assumption of debt: With this financing option, you essentially purchase both the business’s assets and liabilities. In other words, you might assume existing debt. To do so, you often need the approval of debtors.
  • Angel Investor: Try looking for companies that have interested investors to help you finance the purchase of a business, typically these investors like to take stake in the business.
  • Alternative funding and Online Business Funding:  Funding are available for those that do not qualify for a traditional bank funding.  Sharpshooter funding can help you with different options available for your existing or new business.

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Finances of acquired business:

Business owners often struggle to secure funding for business acquisitions because much of the company’s financial history is out of their hands. Any red flags from before the acquisition can prevent them from attaining funding. That, coupled with any personal finance issues, makes it especially difficult to receive the proper funding.

Buying the business is only half the battle. You still need to ensure you have enough funds to operate the business successfully once you acquire it. If you will need additional operational funding, it’s best to negotiate it when you are negotiating the purchase. Trying to get funding immediately after purchasing the business can be difficult.

This section discusses common ways to finance operations.

1. Cash Reserve/Self-Funding

The easiest way to finance operations is to use a cash reserve. This reserve can be initially funded by your own funds. However, it should eventually be financed by the cash flow of the business. You can also improve your cash reserve by paying your suppliers on net-30 or net-60 day terms, rather than paying immediately.

2. Line of Credit

Another effective way to finance operations is using a business line of credit. This revolving facility allows you to borrow as needed and can be paid down as your cash flow improves. It is one of the most flexible ways to finance the operations of a business. However, qualifying for a line of credit can be challenging. Learn more about line of credit qualification requirements.

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3. Invoice Factoring

Lastly, one of the more common reasons businesses experience cash flow problems is that their cash reserves run low and they cannot afford to wait 30 to 60 days to get paid by their customers. This problem is common for companies that sell to commercial clients and it can seriously impact operations.

You can improve cash flow by using invoice factoring. This solution finances your slow-paying invoices and improves the cash flow of your business. It is easier to get than other types of funding and can work well with corporate acquisitions.

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