One of the first things we have to ask a potential buyer is how they plan to finance the purchase of a business. This usually leads to an education session about the terms that a buyer can expect to get on a business/commercial loan. Forget everything you have read or seen on television about “no money down” deals. Be ready to pay 20% down or more, be prepared for Adjustable Rate financing, and be prepared to provide personal guarantees.

Most of the deals we broker end up with local bank financing, and once in awhile financing is provided by a national lender specializing in SBA guaranteed loans. Frequently Seller financing is involved for some portion of the deal, and some times buyers end up drawing down credit cards or going to the “bank of family”.

In cases of Seller financing we always advise sellers to get enough down so that a buyer “will bleed if they walk away”. There is no set percentage to put down, it all depends on the deal. The horror stories we hear about sellers having to take back businesses that have failed usually involve previous sales with very low down payments, so that the buyers had minimal risk.

Our first suggestion is usually to go to the institution that currently holds a mortgage on the business involved, because they know the business and will usually be the easiest to deal with (unless the business is a distressed property).

Many of the deals we handle end up with SBA guaranteed financing. The bad news about that is that it increases the cost, both closing costs and loan rates, the good news is that deals get financed when they otherwise would not. When real estate is involved the most desirable financing often involves SBA 504 program loans processed thru development organizations, and straight business loans are usually guaranteed under the SBA 7(a) program. Full descriptions of the SBA programs are available on the SBA web site, http://www.sba.gov/aboutsba/index.html. We frequently have customers tell us they have been counseled by advisers not to accept SBA guaranteed loans because of past experiences. The SBA guarantee process now is very seldom any problem, and most of the horror stories involve customers who have bad credit or checkered histories, or businesses that have either high risk or very poor histories. The SBA programs are guarantee programs that reduce a lenders risk, so either a bank or other lending institution is always the real source of the money and has to first approve the financing.
During meetings with some local bankers on August 15th the rates they were quoting for loans that fit under the 504 program were in the 7% range, less than prime rate. Rates they were talking about for SBA 7(a) loans were in the 8% range. We have recently received proposals from other institutions offering rates of 10.5% to 10.75% on packages that included operating capital and involved as little as 10% down. Rates in the range of 2.5% over prime are common in business financing. Also most business loans will be at adjustable rates, so one important thing to look for is how long the initial rate is locked in before adjustments begin. Those terms may range from 3 months to 5 years, or more.

So it pays to shop around for a package that suits your needs. But expect financing to be a lot more expensive than residential (or even commercial) real estate, and be prepared to make serious down payments.

There is a lot of mythology floating around about business financing. Instead of listening to your back fence neighbor or the bartender down the street if you have questions about financing ask one of us, or a banker, (or better yet two different bankers).