Buying an existing business: Financing the purchase

Financing options for the purchase of an existing business match those for starting a small business with one exception: seller financing. According to the Small Business Administration, the majority of owners with small businesses for sale offer financing. When considering money sources, the buyer should look first to the seller, then to personal equity and finally outside lenders.

When turning to an outside lender such as a bank or venture capital firm, the buyer must be able to pledge some type of collateral. Commercial lenders consider all fixed and some adequately appraised intangible assets are "fair game." You will not be allowed the full appraised value of those assets. The type and condition of the asset, in part, will determine its collateral value. Personal fixed assets are often pledged as collateral. Generally, real estate is the most preferred personal asset.

Venture capitalists are going to look for a greater return on investment ratio over a shorter period. In exchange for cash, they may want part ownership or to participate in setting the business's policies, procedures and operations. Granting partial ownership bypasses the need for collateral.

For the most part, your financial needs and credit rating, the market appeal of the seller's business and industry, and the related level of risk will determine whether you seek a more traditional, commercial loan, or entertain the idea of venture capital investment.