Entrepreneurs are hopeful people.
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Armed with unbridled enthusiasm and a taste for small business ownership, thousands of would-be owners hurl themselves into the arena, confident they can buy a business with little or no resources. But that's not how business acquisitions work. If you're going to buy another business, you're going to need financing – and lots of it.
Business acquisition financing is more complicated than approaching your local bank for a small business loan. You can (and should) pursue financing through traditional lenders, but your business purchase will probably also require other sources of financing.
The majority of business acquisitions are achieved with funding from a diversity of financing sources. Be prepared to cobble together a financing package from multiple sources, some of which may be easier to execute than others. You will run into roadblocks along the way, but don't be discouraged. Small business acquisition financing is possible – you just need to be persistent and maybe a little creative to make it happen.
- Savings. Many first-time small business owners fund at least part of their acquisition from their own savings. By investing your own resources in the acquisition, you make the purchase more appealing to lenders because you have a horse in the race. Approach your investment as a self-financed transaction with a structured plan to replenish your savings from company profits.
- Friends & family. Borrowing from friends and family members is a very common form of business acquisition financing. Is it uncomfortable? It can be. But you will also find that it's easier to obtain financing from people who know you and believe in you than it is to borrow from stranger who only cares about the numbers.
- Commercial asset borrowing. Commercial lenders are more comfortable financing the purchase of tangible assets than they are financing the purchase of intangible ones. They may finance the asset portion of a business purchase in exchange for a strong collateral position and a viable repayment scenario.
- Seller financing. Sellers are often willing to finance a portion of the sale – but not the whole thing. Be prepared to fund a minimum of at least 30% of the purchase price through other sources before you even think about asking a seller about financing.
- Investors. Angel investors and venture capitalists can be another source of financing, but you'll have to have your ducks in a row before you consider outside investment options. Competition for VC funding is fierce and you'll need to be on top of your game to attract interest.