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Can't Get a Bank Loan to Buy a Business? Consider These Financing Methods

As the economy struggles to rebound, unemployment rates remain at historical highs and millions of Americans are still looking for work. As a result, many have considered following their entrepreneurial dreams and "creating" their own job rather than relying on corporate America to see them through. While hard times have kept demand for small businesses high and a wide selection of options are on the market, most business buyers are facing one major challenge: accessing the capital required to purchase one.

It's rare that a buyer has enough cash to buy a business outright, so traditionally they have relied on a variety of sources to finance the purchase. This is even more relevant today, when times are tough and cash is tight. Unfortunately, the primary source of capital for small business buyers - commercial and bank loans backed by the U.S. Small Business Administration's (SBA) 7(a) loan program – has dried up significantly over the past year. According to numbers released for the SBA's 2009 fiscal year, the 7(a) program made 36% fewer loans than it did in 2008, backing only 44,221 loans from banks for starting, purchasing, or expanding small businesses.

These numbers might seem to paint a grim picture for aspiring business buyers, but fortunately there are other ways to secure financing to buy a business. If you're in the market but faced with a lack of capital and no clear idea of where to start, consider the following financing options:

Peer-to-Peer Lending Networks

If you're unable to access bank capital to finance a small business purchase, one alternative is to turn to peer-to-peer lending networks. These networks remove the involvement of traditional lending institutions, instead allowing lending transactions to take place directly between individuals. If you want to use this route for a loan, you can do so via online companies such as Prosper.com and LendingClub.com. On these sites, loan seekers request a specific amount (typically up to $25,000) at a specific interest rate, and lenders fund all or portions of the loan. Lenders are then paid back with interest over a set period of time. Buyers' success when using these networks depends largely on their credit ratings.

Friends and Family

Borrowing money from the people you're closest to in life is probably the longest-standing method of funding entrepreneurial endeavors. Many people are hesitant to borrow money from friends and family for fear of straining personal relationships, but if you make it a point to hold up your end of the deal under all circumstances and borrow only from individuals who are in a position to lend without risking their own financial health, it can serve as one of the most effective ways to fund a business. If you feel this is an ideal method for your individual situation, you can use sites such as VirginMoney.com to manage the process of borrowing from people you know to ensure all parties involved are comfortable with the deal and confident that all loans will be paid back on time.

Retirement Funds

As with borrowing money from friends or family to buy a business, some might consider using money from a retirement nest-egg as risky. That said, it can often be an effective way to invest in your entrepreneurial endeavors and has had successful outcomes for more and more of today's business buyers. As laid out by the government's ERISA law, you can invest your existing IRA or 401(k) funds to the purchase of a business without taking an early distribution and incurring penalties. It is even possible to combine money from your retirement fund with loans and other funding methods for greater flexibility. Many entrepreneurs choose to invest in a business they control because they believe the growth opportunity is greater and want to diversify a portion of their retirement holdings outside of the stock market. If you find this is a viable option, sites such as GuidantFinancial.com can provide you with more information on this small business investing method.

Seller Financing

Today, more and more business-for-sale transactions are resting on a seller's willingness to finance at least part of a sale. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three-to-five years. This has become essential in a time when buyers are having difficulty accessing funds through traditional methods, therefore naturally gravitating toward seller-financed businesses to help offset some of the cost up front. Sellers who continue to say no to seller financing are finding it difficult to close a deal, and as more of them have realized this, there has in turn been an increase in seller-financed businesses on the market. To make it easier for buyers to locate these businesses, BizBuySell.com recently introduced the ability to filter search results based on a seller's willingness to offer financing.

If you're in the market for a small business it's important to be aware of these alternate funding options, but also know that in some cases it is still possible to borrow from a bank. Government stimulus and bank policy have been trying to promote ongoing small business lending, although many banks are still more conservative than they used to be about to whom and when they'll loan money. If you've inquired and are unable to secure a bank loan, though, taking advantage of one or more of these financing methods could still allow you to achieve the goal of being your own boss. Today's business-for-sale marketplace is full of exciting opportunities that would allow you to take your destiny into your own hands, and with various options available there's no reason to let a shortage of traditional capital sources get in the way of your dreams.

About the Author

Mike Handelsman is the General Manager for BizBuySell.com, the Internet's largest business-for-sale marketplace. Since 1995, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business and potential buyers to find the perfect business. BizBuySell lists more than 50,000 businesses - spanning 80 countries - for sale at any time, with over 4,500 added or updated each month. BizBuySell also has one of the largest databases of sale comparables for recently sold businesses and one of the industry's leading franchise directories. It has approximately 800,000 visitors to the site each month.

Prior to his online experience, Mr. Handelsman began his career in brand management with Procter & Gamble, and also worked as a Management Consultant with McKinsey & Company in Chicago and San Francisco. For the past 15 years, he has had extensive experience dealing directly with start-ups and early-stage businesses.

Mr. Handelsman is a graduate of Duke University, and holds a MBA from the Harvard Business School.

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