With the majority of businesses, financing to buy a business is going to be needed to both keep your business in operation if you have just bought it and/or if you’re looking to expand your business. Here at VR, we will offer advice and support to small and medium-sized businesses, providing some ways to raise capital if you’re looking to buy.
Debt Financing
With this way, the principal must be repaid with interest. However, this does not give the lender ownership control. Depending on what the loan is being used will determine the length of the loan, interest rates, security and other terms.
Commercial Bank Loans
These are usually made to cover temporary or seasonal needs for inventory or personnel – includes short-term loans that last from 30-180 days. New businesses will generally have a harder time obtaining these, unlike established businesses that will be approved most of the time for commercial bank loans. This will include medium to long-term loans as well that can be repaid anywhere from one to five to 20 years in some cases depending on how the funds will be used.
The source of repayment is the cash flow of the business. Businesses will use these types of loans for equipment and fixed assets for example.
Despite the greater difficulty obtaining, commercial bank loans will be the type that small businesses use to get the ball moving.
Equity Financing
When the business owner, private investors and/or venture capitalists place money into a business, it’s known as equity financing. This gives an investor ownership and possible some control of the business.
You are encouraged to use your own savings in order to get other investors to contribute capital. Remember that it will be impossible to start or buy a business without using some of your own personal funds, let alone trying to convince someone else to invest in your business if you’re not willing.
Good sources of equity financing include friends, relatives and business associates among others. Most small businesses get started with this kind of assistance. They may provide some of the cash or may back a loan from a financing institution.
Venture capitalists are another group that invest in a new or existing business – usually high-tech or innovative concepts that are looking for a very high return on investment that range from several hundred thousand to millions of dollars.
Internal Financing
Customers can stand as a source of temporary financing if they provide raw materials or issue a cash deposit; however, this not feasible in most businesses. Once you have obtained a good reputation with your suppliers, you may be able to apply for 30-to-90-day credit.
Basic 7 (A) Loan Guaranty
This is the SBA’s most flexible loan program, where financing can be made available for loans up to $2 million. The 7 (a) serves as the SBA’s primary program to help qualified small businesses obtain financing. Loan proceeds can be used for most business purposes, including working capital, machinery, equipment, furniture and fixtures. Existing businesses are the typical borrower for this kind of loan.
Micro-Loan 7 (M) Program
Small businesses and not-for-profit child care centers for working capital or purchase of inventory, supplies, furniture, fixtures, equipment or machinery can seek this program that provides short term loans up to $35,000.
Community Express
Providing small business loans up to a maximum of $250,000, this program makes it easier and faster for selected lenders where it’s available to people that meet the normal requirement but are also located in a low to moderate income area or have a current or proposed business owned mostly by a minority, woman or veteran.
504 Loan Program
This type provides long-term fixed rate financing to small businesses in order to buy real estate, machinery or equipment for expansion or modernization. This program provides long terms loans up to $1.5 million maximum for a single project and $4 million for manufacturers with a loan minimum of $50,000.