Business Financing Strategies
Have you ever wondered what your life would be like if you were a business owner and were in total control of your life?
Have you ever wanted to buy a business, but had no idea how, or where to look to find money to get started?
Is not knowing where to find money holding you back from pursuing your dreams of owning a business and controlling your life?
Spending time looking for a business without knowing how to get financing for it would be like a fisherman without a boat, a golfer without clubs, or baseball player without bat.
There are plenty of Business Financing Strategies and ways to fund a deal once you find one, and the better the deal, the easier it becomes to find the money!
Grab something to write with because I’m going to share with you 9 (out of about 100) different ways to finance the purchase of a business.
Business Financing Strategies:
- Private Money
- Hard Money
- Lines of Credit
- Banks and SBA
- Credit Cards
- Your Own Cash
- Assuming Existing Financing
- Equity Exchanging
The purpose of this presentation is the share a few business financing strategies so you can begin thinking of different ways you can finance a business when the time comes for you to buy one.
I’m going to do my best to present to you the positives and negatives of each type of funding so you can get a better understanding of the process and when the time comes, make an informed decision for yourself.
Are You Ready to get started?
#1) Private Money What is Private Money? Private Money is considered any money that an individual has pledged they will loan to you for the purpose of funding. Private money lenders can come from many different people in your life: These could be friends, family, business contacts, referrals, other investors, and of course, the Seller!
Anyone who has cash in a savings account, checking account, mutual fund, Certificate of Deposit, stocks, IRA’s (traditional and Roth) or any other financial instrument could be a potential private lender.
The seller of a business is also a terrific source of funding.
Private lenders will loan money to you based on their trust in you and the collateral that secures their funds which is the business, or real estate the business operates out of.
When individuals decide to loan you their savings for the purpose of funding deals, they’re most likely going to do it because it’s better return on their investment than sitting in a bank account someplace making 2 or 3% interest.
Here are the benefits of using private lending methods to purchase a business:
Quick Closings – When you have private money available to you, you can make offers with a quick closing date. Many sellers will take a much lower price for a quick – cash closing.
My dad always says You Can Get All Cash, But I Set The Price, or You Can Set The Price, But I Set The Terms. You Can Have One or The Other – But Not Both
When you have private funds available to you this can set you apart from other buyers who may need 30 – 60 days to get financing.
No Points – Points are a percentage of the loan amount. For example, 1 point would be 1% of the loan amount. Usually points are paid in addition to the interest paid. If a lender is charging you points they are more of a hard money lender than a private money lender. Some banks and mortgage companies also charge points on their loans. Here’s an example. A private lender loans you 100k. You agree to pay them 10% on their money for the time period you borrow it and also agree to pay 1 point. Let’s say you use the cash for 1 full year and then pay off the private loan from revenue generated from the business, or a credit line you established.
For that one year you would pay the private lender 10% interest which = 10k plus 1 point which = 1k. So all told it would cost you 11k to borrow the money.
No Loan Origination Fees – Most loan brokers charge loan origination fees. This is basically a commission for doing the loan for you. Loan origination fees can range from 1% – 4% of the loan amount. By using a private lender you can avoid those fees.
No Lender Fees – Many lending companies charge lender fees. These are similar to loan origination fees but they are paid directly to the lender for processing and approving your loan. Again, why pay these fees if you can avoid them? Lender fees range from .5% to 2% of the loan amount.
No Credit Checks – Another great characteristic of private funds is the fact that nobody will check your credit. Weather you have good or bad credit nobody is going to pull your credit to determine you borrowing capacity.
However, when using private funds there will be no credit checks so you can leave all that behind.
Nothing Shows Up On Your Credit Report – Did you know that private money loans do not show up on your credit report? Yep, that’s right.
So if you do go to a regular bank to buy your own personal residence and have a million dollars in private loans on a business you own, it won’t show up.
Cheaper Than Bringing in Partners – When you buy a business with a partner, how much is your partner going to want?
Typically, they want a percentage of the profits. How much of the profits?
Usually between 25 & 50%! Ouch!!
That’s a lot of money for a partner’s cut; especially if you’re doing all of the work! Private lenders are much cheaper than partners.
In conclusion private money, is a very good form of financing.
The only negatives about private money are that you have to go find it because there aren’t people out there advertising that they are private money lenders.
You have to open your mouth, do some advertising and talk to people with money in order to find it.
The EASIEST way to raise private money when buying a business is from the seller and we will explore that in more detail in #8.
Business Financing Strategies
#2) Hard Money – What is Hard Money? In business the term commonly used is Factors and Factoring.
There are companies out there who make a business out of loaning money. These companies are similar to private money lenders in a few ways and different in other ways. We will explain those differences in this section.
They Set the Rules – Hard money is considered “hard money” because there are rules, regulations and limitations set by hard money lenders that you will not find from private money lenders.
Most hard money lenders have VERY, VERY strict guidelines on what they will finance. They set the rules and the investor/buyer and property must fall within these guidelines to qualify or else they simply will not loan the money out.
Points – Hard money lenders charge points to borrow their cash. I have seen points on a loan from 1 to 5. This means if borrow 100k from the hard money lender they will charge you between $1,000 and $5,000 dollars in addition to the interest charged.
Interest – Hard money lenders typically charge between 12-16% interest on the money they lend out. This is typically paid back as receivables are collected. They take a percentage of the money collected to pay the interest and part of the principal.
More Business Financing Strategies
#3) Lines of Credit – What do I mean by lines of credit? Lines of credit can be secured or unsecured.
They can be attached as a lien against a property or they can be just an outstanding revolving amount of money like a credit card.
Every business should have, and work on building lines of credit.
There are companies out there that specialize in helping people and business owners alike establish lines of credit.
Benefits of Lines of Credit – Lines of credit can be used and re-used again and again. Once a borrower is approved for a line of credit it almost never goes away unless the borrower cancels the line of credit.
#4) Banks and SBA Lending – Regular banks are a source for funds to buy anything. You can walk into any bank on most busy streets and get a regular bank loan. This is not some new radical concept.
SBA – Many Banks will want to limit their risk and only lend via SBA guarantees.
While SBA financing is done all of the time and it a terrific way to get money to purchase a business, it is a paperwork calamity, and can take anywhere from 3 to 9 months.
More Business Financing Strategies
#5) Partners – The concept of bringing in Partners is pretty simple to understand. If you do not have the credit, private money, hard money or cash you probably know someone who does.
If you find a business deal that you can’t pass up and don’t have the resources, find someone who does and give them a cut of the profit.
You found the deal and know how to fix it up and sell it for a profit. Without the financing the deal will not get done. You need a partner and a partner needs you. You found the deal. He has the cash or credit to get it done.
So what’s a reasonable split? It’s all negotiable and totally up to you.
Just make sure to put it in writing and make sure the salary you take out of the business DOES NOT count as profit. Get paid for your work and effort – split the leftovers with your partner.
#6) Credit Cards – This is one I would completely stay away from. Credit cards are way too easy to abuse. They are also typically have way too small of an available balance to be of any real use to you. Even if you have 20-40k available credit on your card what good long term is that going to do for you? You are going to pay between 10-29% interest on those.
My advice would be to simply keep the credit cards in your pocket. And use them for day to day operating costs when needed.
#7) Your Own CASH – Cash is king right?
If you have cash to invest, and you see a good business, use it.
Nothing is better than better than being in 100% total and complete control.
True Freedom comes from not having to answer to anyone.
#8) Subject to Financing – The concept of buying a business with subject to the existing loans is a great way to finance purchase. Buy the business and leave the existing financing in place.
#9) Equity Exchanging – This is getting into very “Creative” financing strategies and I wanted to end this presentation with it because it will get you
Whatever you own, you can use as value and trade for something else. You can trade cars, boats, planes, lots and land, artwork, jewelry and paperclips!
There is a true story of a guy named Kyle MacDonald who traded one red paperclip for a house. He started with one red paperclip on July 12, 2005 and 14 trades later, on July 12, 2006, he traded with the Town of Kipling Saskatchewan for a house!
Business Financing Strategies