Financing an Existing Business

Most potential business owners know that one of the biggest challenges of starting a business involves obtaining the needed financing for it. Financing a new business is a challenge because new businesses are considered riskier by lenders than companies that have been in business for years and that have a strong track record of repaying their debt obligations. In addition, with business failure rates, lenders have no guarantee of knowing whether or not the new business is going to make it long enough to start repaying their debt. But what if you want to purchase and finance an existing business? Is financing an existing business purchase riskier than starting from scratch and what are the chances of finding a lender who will decide to support you?

Up front, one of the good things about buying an existing business as opposed to starting a business and building it up from scratch is that it may be easier to tell if the business is going to be viable. This is because the existing business already has more than likely years of income reporting that they can provide to you – and in turn you can provide to whoever you have in mind to provide the financing for the purchase. On the downside of this equation, if you’re buying a business that is currently struggling or has been struggling financially in the past, it’s not going to help you obtain the financing that you’re going to need. To finance an existing business purchase, here are a few tips to help you along your way:

• If the business you are buying is strapped financially, it may be possible to obtain seller-financing. This is when the new buyer makes scheduled payments to the existing owner, rather than a bank or lender.
• Another way to obtain financing is to offer collateral to secure a loan. This may be a good option if you finance the purchase of the existing business with your own funds, but you need a higher cash flow to expand the business or keep it moving in a positive direction.
• Don’t forget to develop a business plan to give to potential lenders – even though the business you’re buying is existing, a lender will still want to know what your plans for the company is and how it will function under your ownership.
• If the business you’re buying has an existing location locally, it may be helpful to start with local lenders. Local lenders will be more apt to want to keep a business in their local area than to see it move away. It’s also a good idea to check for grants that may be available to keep businesses in the area.
• The last tip is to talk with the current business owners to see if they can recommend a lender based on their experience in the industry.

While obtaining financing for an existing business purchase is usually easier due to less risks and a better paper trail, it doesn’t mean that you won’t face any roadblocks. Due to this, it’s better to be prepared than to worry about whether or not you’ll be able to obtain the financing that you need.