Small business loans are a common method for sourcing funds in starting or buying a business for sale. But with all business decisions taking out a loan should be done with proper planning and investigation. Before applying for a small business loan, you need to have a developed business plan and determine if the business you are buying is feasible then ask yourself:
- How much money do I need to purchase the business?
- What other initial costs will I have? Marketing, staff, equipment, buying stock, repairs, upgrades. Do these costs need to be part of the loan, or can the business income cover these in the future?
- What is the expected income of the business? How do I intend to repay the loan, how long will it take to make the repayments?
The next question is which type of small business loan would best suit your needs. This can always be discussed with your financial advisor or bank representative. Going into a small business lender with a clear business plan, and an outline of your costs will allow them to better assess what loan would best suit your business needs. Be sure to compare the loans offered, speak with your accountant and have a clear understanding of the terms before signing.
Today, we are also seeing a lot of ‘vendor financing’ where the individual selling the business offers a loan to be repaid based on the income of the business with interest attached. Normally a % of the business is paid upfront and the remainder in a loan repayment form. Though, this can get tricky if payments are not made as set out in the loan agreement, which has implications for the previous owner as well as the current. But it is another method to selling a business and closing the deal, sometimes with advantages to both the buyer and seller.