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4 Non-Traditional Ways to Finance a Business Purchase

Posted by biz4less on October 28, 2018
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Securing traditional financing for a small business acquisition is rarely a slam dunk. Commercial lenders can be skittish about financing unproven entrepreneurs, and challenges relating to down payments and collateral can limit opportunities for seller financing or other traditional funding mechanisms (primarily, loans)

But a lack of traditional financing options doesn’t necessarily mean that you have to call it quits on your ownership ambitions. Increasingly, business buyers are turning to newer, non-traditional financing techniques to fund the purchase of small companies and microbusinesses.

Alternative Financial Strategies for Business Buyers

Alternate non-traditional financing strategies allow you to secure relatively small amounts of capital using methods that fall outside of traditional lending or investment scenarios. Although many people assume that these financing sources are a buyer’s last resort, that isn’t always the case. In some instances, buyers pursue non-traditional financing because it offers benefits that traditional financing vehicles can’t provide.

There are many different types of alternative financing opportunities available in today’s business-for-sale marketplace. Some of the most common sources include:

Peer-to-Peer Financing

Peer-to-peer (P2P) financing networks are online investment platforms that appeal to buyers who can’t obtain traditional financing because they may have a less-than-perfect credit history, or they simply want to speed up the loan process. Since P2P networks operate with low overhead, they sometimes offer lower interest rates than traditional lenders, and the administrative friction in the process can be a lot lower, and therefore faster, as well.

If you choose to go this route for a loan, you can do so via online companies like 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.

P2P networks are just starting to gain steam with small business buyers, so do your research before you commit to a P2P funding strategy.

Crowdfunding

Over the past few years, crowdfunding has emerged as a viable funding strategy for would-be small business owners, creating opportunities to raise capital from large pools of contributors through sites like Kickstarter and Indiegogo.

In general, the most successful crowdfunding projects are rewards based. Since competition for dollars can be fierce, it’s important to incentivize contributors with something of value, like early access to a product or service.

The drawback of crowdfunding is that it takes time and it can be difficult to attract enough contributors to meet your funding requirements. There is also some legal uncertainty about how the SEC will ultimately view and regulate these funding sources. But if you can pull it off, one of the side-benefits is that many of your crowd-funders will convert to customers after you have completed the acquisition, and you have already initiated the viral marketing of your new business.

Microfinance

Depending on how much capital you need, you may be able to finance your acquisition with a microloan. Microloans are different than traditional loans because they are smaller (usually $50,000 or less) and have shorter repayment periods (up to six years).

Small loan sizes mean that microloans can also be easier to obtain than traditional bank loans, making them an attractive financing option for buyers of micro or small businesses. Since commercial lenders typically don’t offer these types of business loans, look for microfinance programs offered through the Small Business Administration (SBA) and microlending specialists like Accion.

401(k) Retirement Funds

It can be risky to use 401(k) or IRA savings to fund a business acquisition. But with the right strategy, it’s possible to roll retirement savings into stock for the new business, circumventing taxes and early withdrawal penalties.

The upside is that you can leverage your own capital to fund the purchase of the business. But if the business fails, you stand to lose the money you were counting on to fund your retirement. Financing leaders in this space include Guidant Financial and Benetrends.

No financing mechanism is right for every small business buyer, and for some buyers non-traditional financing can be a big mistake. To avoid unexpected challenges, consult with your financial advisor, accountant, or business broker before you decide to utilize one of these alternative financing sources.

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