Financing a New Business

If you are planning on buying a small business, it is important to know the different small business financing options available to you as you embark on this journey. Knowing small business finance options, like how to apply for a small business loan, for a small business purchase in advance can save you time and headaches.

The Small Business Administration does not offer small business loans. However, the SBA has several programs that are designed to help small businesses. The role that the SBA takes is a partial guarantor or a full guarantor of the loan.

The Basic 7(a) Loan Guarantee Program is the most frequently used program that the SBA offers. Under this program, a lender can loan a qualified business up to $2,000,000. Funds can be used for improvements, working capital and, under certain circumstances, debt financing. The SBA focuses in on your ability to repay the loan through cash flow of the business as well as personal credit and references in this program.

The Small Business Administration also works with investors under the Small Business Investment Companies (SBIC) program. Businesses that invest through this program are regulated and licensed by the SBA. In return for the investment in your company, the investors will receive part ownership of your business.

Self Financing
Self-financing is using your own money to finance a business. While potential investors like to see a business where you have invested at least 25% of your own money into your company, being completely self-financed can be dicey unless you are reasonably sure that the business will pay you back within a given period of time.

Secured Loan
If you have assets such as a home, you can use these assets for collateral and try for a personal secured loan. Keep in mind that if your business fails, you may loose your house with this type of loan.

Retirement Funds
Do you have a 401K Plan or IRA? If so, you might be able to use it to finance your business purchase. You may also be able to do this without paying penalties and taxes. Talk with a financial professional about your situation to see if this is a viable option for you.

Owner Financing
In this scenario, you would place a down payment and finance the balance through the seller and pay the seller rather than a bank. This arrangement can work to the advantage of both the seller and the buyer because the seller can get a higher rate of return on money than he or she might in other types of investments. The buyer can save on expenses related to taking out a loan.

Each small business financing option can have tax implications. In addition, you will want to make sure that you understand any legal requirements associated with your financing. Make sure that you consult with experts before making your final decision on how to finance a small business purchase.

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