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SBA Loans & Other Financing Options For Your Business Acquisition

By Amanda Raab
| Reading Time: 3 minutes

Starting your own business isn’t the only way to become an entrepreneur. You can also enter the marketplace as a successful business owner by purchasing a business. That said, securing the necessary funds – such as a SBA loan – can be a challenge even if you’re an experienced business owner. If you’re thinking about buying a business, it’s important to understand the financing options available, and their respective benefits and risks.

Funding Your Business With a SBA Loan

The SBA (Small Business Administration) is an invaluable financing resource for small businesses across America—to the tune of an estimated $50 million every single day. While SBA financing is a common and popular option, that doesn’t mean it’s a walk in the park to qualify.

After an extended period of turbulent times for the American economy, banks have finally become more open to loans for small businesses. But you will need to do your homework (along with a little legwork) in order to give your application the best chance at approval. [list type=”disc”]

  • Know the Criteria: The most important criterion for obtaining an SBA loan is that the requested funds must be for “sound business purposes,” i.e. a legitimate, legal, and practical business.Another criterion is your credit score. Banks are more likely to approve your loan if you (and any business partners) are experienced and have good business or personal credit histories.Banks may also require a very specific repayment timeline, adequate collateral, and personal investment in the business for which you’re applying.
  • Get Your Documentation in Order: The exact documents banks will request may vary, but in general, be prepared to submit:
    • your personal and business credit histories.
    • a detailed business plan.
    • three years’ worth of financial statements for the business, as well as financial projections for at least one year.
    • your personal financial details.
    • personal repayment guarantees from you and any partners.
  • Prep Now for Less Stress Later: Because the loan process can be a complex and time-consuming one, your best bet is to research your options as thoroughly as possible before you begin. Take advantage of the free assistance available from your local SBA office, get practical advice from mentoring organizations such as SCORE, or visit a Small Business Development Center (SBDC) to get hands-on assistance.

An SBA loan isn’t the only option available to you as a business owner, of course. Depending on your goals and needs, other financing options may prove as attractive as, or even preferable to, a traditional loan.

  • Ask Your Bank About Alternative Financing: Depending on the financial institution you use, you may qualify for financing options beyond an SBA loan. For example, both Wells Fargo and U.S. Bank offer a variety of financial products for small business owners (some of which are geared toward short-term financing, are secured with or without collateral, and come with much shorter turnaround times than traditional loans).
  • Consider Owner Financing: Some sellers may be open to this method of purchase, which allows you to finance part of the asking price through an agreement with the current owner. Sellers may be reticent to pursue owner financing for a variety of reasons, but if you’re flexible and ready to negotiate satisfactory terms, it can be a viable option when purchasing your business.
  • Draw on Your Personal Network: Friends and family members can be lifesavers when it comes to financing your new business. This option can put a strain on your personal relationships, however, so it’s smart to treat these loans like any other business arrangement with regard to terms, interest, and repayment.
  • Consider Crowdsourcing: Another way to let others invest in your business without the potential drama (or trauma!) of personal loans is to use crowdsourcing. Companies such as TrustLeaf and Prosper manage investors, loans, and repayment scheduling in exchange for a fee, letting you focus on starting your business and giving your investors peace of mind.
  • Repurpose Your Savings: If you can swing it, bankrolling your businesses with your personal savings or 401(k) is another way to get your business up and running. The latter option—sometimes known as ROBS, for “Retirement-Owned Business” or “Rollover as Business Startup”—allows you to avoid the usual tax and income penalties for early withdrawal while providing the necessary cash to purchase your new business. Because of the potential loss of a lifetime’s hard-earned savings should things go south, carefully weigh your options—and consult your financial professional—before pursuing this option.

Becoming a business owner is an exciting opportunity, but getting the funding you need can end up seeming like a bigger project than the business itself. If you invest the necessary time and effort into preparing for the process, exploring all your options, and understanding the risks, you can help ensure you secure the funds you need with a minimum of stress and frustration.

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