There are several small business finance options available if you’re looking to buy an existing business online.
They can range from debt financing like bank or SBA loans to equity financing like venture capital or angel investors.
They all have their own relative advantages and disadvantages so choosing the one that is right for you depends on your financial situation what you’re looking for in business financing.
Types of Financing
There are two main types of funding if you’re thinking about buying a small business online. They are broken down into two main categories: debt financing and equity financing.
Debt financing involves borrowing money to fund the purchase, like a bank or SBA loan.
Equity financing is when you sell a portion of the equity in the company in exchange for the funds used to buy the business.
Debt Financing
- Traditional bank loans
This is where you go to a bank or credit union and apply for a loan to fund your business acquisition. You must have good credit and provide a sizeable down payment or collateral. Lenders usually offer fixed or variable terms and terms can range from one to seven years.
- SBA loans
The Small Business Administration (SBA) doesn’t loan money but instead guarantees much of a loan between traditional lenders and acquisition entrepreneurs. Much like a loan, you need to have good credit, but SBA loans only require 10 percent down and offer generous repayment terms in the form or low interest rates and 10-year terms.
- Online lenders
There are several online lenders out there that usually have more lenient requirements and quick turnaround times. However, they usually charge higher interest rates and shorter repayment terms.
Equity financing
- Angel investors
Angel investors are private investors who provide financial backing for small startups or acquisition entrepreneurs. They are typically high-net-worth individuals who receive ownership equity in exchange for funding.
- Venture capital
This is a form of private equity that provides funds to startups or acquisition entrepreneurs in exchange for ownership in the venture. They often want a large ownership stake and will likely seek to exert a fair deal of control over the operations of the business.
- Crowdfunding
Thiis is a way of raising funds through crowdfunding websites like GoFundMe or Kickstarter where many individuals contribute relatively small amounts so a company can launch a business or project. Individuals usually receive a special product in exchange for contributing money.
Factors to Consider When Choosing a Financing Option
Deciding which funding option is best for you is ultimately up to you as they all have their relative strengths and weaknesses.
SBA loans offer long repayment terms and relatively low interest rates relative to traditional bank loans but It’s a complicated process. Both forms of debt financing require good credit and some form of collateral or down payment. SBA only requires 10 percent down vs. 20-25 percent for traditional bank loans.
If you need money in a hurry, online lenders might be a good fit, but you’ll pay much higher interest rates and shorter repayment terms.
Equity financing is an attractive option if you can’t secure a loan, but you’ll have to give up ownership which will ultimately cost you in the long run because you’ll always be sharing profits. The same goes for when you decide to exit the business as you’ll have to pay out the portion of the ownership stake.
Angel investors are looking to make a profit but are also usually interested in providing wisdom and guidance to make sure the business is successful. However, they are probably hard to find.
Venture capital will likely want to exert a great deal of control and can sometimes push for an exit to cash out on their ownership instead of working on long-term growth.
Preparing Your Business for Financing
There are several steps to securing business financing.
You’ll want to make sure you have a good business plan that you can present to traditional lending institutions or equity financiers. As well as gathering the necessary financial documentation.
A good credit score is essential to securing debt financing so do whatever you can to improve that.
Choosing The Right Business to Purchase
You’ll also want to decide what sort of business you want to buy. Much like the choice of financing, this is entirely up to what fits your investment plan.
Then there will be a due diligence process where you evaluate all aspects of the business to make sure that you know what you’re getting.
This can include reviewing at least three years of financial records to make sure that it is a profitable one.
Then you’ll have to settle on a fair price before negotiating with the current owner and finally closing the deal.
This will also involve negotiating a portion of the seller’s financing, essentially a private loan between you and the seller.
Conclusion
If you’re looking to buy a business online, there are a variety of funding sources – each with their own advantages and disadvantages.
Most of the debt financing options require good personal credit and some form of collateral. They also mean that you retain control of your business both in terms of equity and operational control.
Equity financing, on the other hand, necessarily requires giving up a portion of the business in exchange for funding for the purchase price.
No matter what you choose, buying an existing business is generally considered less risky than trying to a launch a startup, the vast majority of which ultimately fail.
Buying an existing, profitable business means you are already getting a proven concept and customer base. Ideally you should be getting all the company’s employees so there is no need to hire and train staff.
Consider your funding options carefully if you want to jump into acquisition entrepreneurship.
