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Is It Possible To Buy A Business With Little Or No Collateral?

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Is It Possible To Buy A Business With Little Or No Collateral?

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ENLIGN DEAL TEAM | 06/10/2022

When it comes to getting a loan, you can be certain that a bank will want collateral. This is true for both personal and business loans. Simply stated, if you have collateral, your bank won’t be concerned about being left empty handed if you can’t repay the loan. Many budding business owners are, in fact, held back by the fact that they lack the collateral needed to buy a business. However, the good news is that there are ways that one can buy a business with no collateral or very little collateral.

The Small Business Administration (SBA) is the first stop for those wanting to start a business with a low level of collateral. The SBA’s 7 (a) program provides banks with incentives to make loans to buyers. It is through this program that the SBA will provide guarantees for 75% of the outstanding principal loan amount. In most cases the borrower will be required to bring 10% of the purchase price to closing.

The bank is on the hook for 25% of the then outstanding principal loan amount in the event of a borrower default. This means that on a $1 million dollar business, the borrower just has to come up with $100,000 and not the full $1 million dollars. These loans typically have 10 year amortization periods.

Through the SBA’s 7 (a) program it is possible for prospective business owners to consider businesses that would otherwise be completely out of their reach. The cash that buyers use to meet the 10% down payment requirement cannot come from an investor or a gift although experienced brokers can structure a transaction with money from a minority shareholder. There is also a sophisticated structuring technique that can reduce the buyers downpayment to 5%. Anyone looking to become a first time business owner will want to fully explore all that the SBA’s 7 (a) program has to offer with an experienced business broker.

A second route for those looking to buy their first business is seller financing. Seller financing has become rare, as the SBA no longer requires it.

If sellers are motivated, they are much more willing to consider seller financing. Keep in mind that there are many reasons why a seller may be motivated, such as retirement, unexpected personal problems, or just burnout. Sellers of high quality business generate enough buyer interest that Seller financing isn't required.

Seller financing and the SBA’s 7 (a) program could, in some situations, be used together. This combination could serve to greatly increase your chances of buying a business.

This is not to state that there are zero obstacles or limitations with the SBA’s 7 (a) program. For example, if Seller financing is being used towards the required 10% Buyer equity injection the Sellers cannot receive any form of payment for the entire 10 year term of the loan. There are ways to address this problem, but it is something that buyers and sellers alike should be ready to address.

A lack of collateral doesn’t have to mean the end of the dream of owning a business. If you are interested in owning your own business and lack collateral, meet with an experienced SBA loan packager, an experienced business broker or an M&A advisor. An experienced brokerage professional will have a wide-array of solutions as to how to buy a business with little or limited collateral.

Copyright: ENLIGN Business Brokers, Inc. diego cervo/BigStock.com

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