Business purchases are either financed through third party lending, or with Seller financing. The size and type of business is an important factor. Micro-sized businesses with a value under $200-300,000 often require Seller financing. Most Banks will not consider them. Many Sellers do not want to finance the sale of their business, unless there is no possibility of third-party financing. For the Seller to finance, the Buyer will be required in most cases to inject a 50% down payment. The Buyer must have a very strong credit rating, as well as direct business experience.
For larger businesses, the purchase can be financed through a third-party lender, typically a bank. Most banks doing loans for business acquisitions do so utilizing the federal government’s SBA (Small Business Administration) guaranteed lending program. The SBA limits the risk for the bank by guaranteeing a significant portion of the loan. Historically this has been 75% of the amount of the loan. Historically the buyer would inject 20% of the purchase price to satisfy the down payment requirement, and pay certain other closing costs associated with the SBA loan. An obvious benefit to a buyer is the ability to leverage the purchase. Whereas a Seller would want a 50% down payment, the down payment utilizing SBA is much lower (20%). With Seller financing the term of the loan may be at a maximum of 5 years, and with SBA financing the term can be up to 10 years.
Currently the SBA has increased the incentives for these business purchase loans. They have lowered the down payment requirement to 10%. They have waived the Buyers SBA Guarantee Fee, which can be $5,000 to $15,000 depending on the size of the loan. The SBA will also, for businesses under agreement in 2021 through September 30, 2021, make the first six months of amortized monthly payments to the lender. These are very positive incentives in response to the current COVID 19 economic downturn.