This article are provided for information purposes only, and are not intended as legal advice.


How do you finance buying a business?

September 11th, 2009

There are many ways to finance buying a business, the main question is your financing economical for the business which you want to acquire?  In today’s economy, banks are not lending money very readily and some banks, they will  not admit publicly, will lend only to existing clients but not to new clients unless they are very low risk.  Remember, banks lend money to you when you do not need the money, they are not always there when you need them the most.

 

Traditional bank financing may support a working capital loan and maybe they may look at financing the acquisition but it will depend on the assets in the business being purchased.  If you are buying a manufacturing business or a business with substantial capital assets, then there could be a lot of equity in those assets.  If you look for example at a a company that owns trucks, the business may amortize their trucks using a 30% declining balance, effectively 100% of the truck is amortized full in 7 years with the bulk being amortized over the first 3 years.  Trucks, if maintained may have an economic life of 12 years.  If you financed the vehicles over 3 years and depreciated them at 30% declining balance, the financial statements may not show that there is a lot of equity in that asset after 3 years.  A lender may lend you money based on an appraised value of the assets which could be far greater than the accounting value of the asset.  Same goes for manufacturing and other equipment.  In summary, a financial institution or leasing company if you did a sale and leaseback on the assets could help you finance part of the purchase price.  Keep in mind, if you do a  sale and leaseback of the asset, you may  trigger a gain on the sale of the asset and income taxes may be owing.

 

Other ways to finance your business will include angel investors, venture capital, mezzanine financing if your business is large enough, collateral mortgage on personal assets including your house to support your business loan, factoring, sale of receivables are all ways to finance the business.  Some may have significant costs.  A general rule of thumb is that the less security there is, the higher the cost of financing will be because there is a large risk element involved in the financing. 

 

Remember, someone who is a venture capitalist looks to make a minimun 25% return on their portfolio.  If they have 10 businesses in their portfolio, two will be very successful, on average, 3 to 6 will be break even and they will lose money on the rest.  As a result the return on the good ones must more than make up the losses on the bad ones, they are looking for more than a 25% return per investment.  That is factored into the pricing of their financing for you.


Filed under: Financing a business — Gary Landa @ 9:34 am


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