Can’t Get a Bank Loan to Buy a Business? Look to Other Financing Methods

Although most agree that the worst of the economic downturn is behind us, unemployment remains at historical highs and there’s no guarantee as to when that will change. As a result, many of the millions of U.S. workers who are out of jobs have considered following their entrepreneurial dreams and “creating” their own job rather than continuing to rely on corporate America to see them through. In addition, the business-for-sale market is filled with a backlog of businesses that haven’t sold over the past 12-to-24 months. For most, the biggest challenge of navigating the path to be your own boss, though, is securing financing to purchase a business. With a high level of demand for small business purchases and business sellers lowering prices to create good buying opportunities, the one missing ingredient of the puzzle is capital to fund small business purchases.

It’s rare that a buyer has enough cash to buy a business outright, so traditionally they have relied on a variety of sources to finance the purchase. This is even truer today, when times are tough and cash is tight. Unfortunately, the primary source of capital for small business buyers – commercial and bank loans backed by the U.S. Small Business Administration’s (SBA) 7(a) loan program – has dried of significantly over the past year. According to numbers released for the SBA’s 2009 fiscal year, the 7(a) program made 36% fewer loans than it did in 2008, backing only 44,221 loans from banks for starting, purchasing, or expanding small businesses.

Although these numbers might make the outlook seem grim for aspiring business buyers, fortunately there are additional ways to secure financing for a business purchasing. Here is a rundown of methods, programs and resources buyers can consider:

Peer-to-Peer Lending Networks

One option for buyers in the market for a small business who are unable to access bank capital is to turn to peer-to-peer lending networks. These networks remove the involvement of traditional lending institutions, instead allowing for transactions directly between individuals. Buyers can access this type of lending from online companies such as Prosper.com and LendingClub.com. On these sites, loan seekers request a specific amount (typically up to $25,000) at a specific interest rate, and lenders bid on portions of the loan to fund to be paid back with interest over a set period of time. Buyers’ success when using these networks depends largely on their credit ratings.

Friends and Family

Borrowing money from the people you’re closest to in life is probably the longest-standing method of funding entrepreneurial endeavors. Many people are hesitant to borrow money from friends and family for fear of straining personal relationships, but if you make it a point to hold up your end of the deal regardless of future circumstances and borrow only from individuals who are in a position to lend without risking their own financial health, it can serve as one of the most effective ways to secure financing. If you feel that you are in a situation ideal for borrowing money in this way, you can use sites such as VirginMoney.com to manage the process of borrowing from people you know to ensure all parties involved are comfortable with the deal and confident that all loans will be paid back on time.

Retirement Funds

As with borrowing money from friends or family to buy a business, some might consider using money from your retirement nest-egg as risky. That said, it can often be an effective way to fund entrepreneurial endeavors and lead to successful results for more and more of today’s business buyers who have found it difficult to access funds by other methods. As a result of the government’s ERISA law, you can direct your retirement funds to the purchase of a business without incurring early distribution penalties. It is even possible to combine money from your retirement fund with loans and other funding methods for greater flexibility. If you find this is a viable option, you can turn to sites such as GuidantFinancial.com for assistance using your 401k or IRA savings without penalty.

Seller Financing

Today, more and more business-for-sale transactions are resting on a seller’s willingness to finance at least part of a sale. After all, in a time when buyers are having a difficult time accessing funds through traditional methods, they naturally gravitate toward businesses with sellers that offer financing so they can offset some of the cost up front. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three-to-five years. Sellers who continue to say no to seller financing are finding it difficult to close a deal, and as a greater amount have realized this, there has been an increase of businesses offering financing on the market. We recently implemented a feature on BizBuySell.com that allows aspiring buyers to search only for businesses listings that include seller financing, making it easier to find options that fit within your financial boundaries.

By leveraging one or more of these financing methods in place of increasingly inaccessible bank loans, you don’t have to give up on the goal of being your own boss. Today’s business-for-sale marketplace is full of exciting opportunities that can allow you to take your destiny into your own hands, so there’s no reason to let a shortage of traditional capital sources get in the way of your dreams.

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