Financing Options for Purchasing a BusinessShow me the money!  It doesn’t matter how good your ideas and plans and business are, you can’t move forward without funding. When you are buying a business, what are your funding options? Let the business law attorneys at Corporon & Katz, LLC help you determine what kind of business financing is right for you.

Practical Financing Options

There are always practical ways to fund your business:

  • using your own savings or resources,
  • borrowing money from friends and family,
  • working from home,
  • working part-time at a paid job (to help fund the company and supplement your income),
  • obtaining product pre-sales (i.e. getting commitments and payments from customers prior to starting work).

Traditional Financing Options

You can obtain financing from traditional sources, which includes angel investors, banks, venture capital, and other types of credit.  Once you reach a certain level of revenue and are ready to go to the next level, angel investors may become an option.  Angel investors invest in your company in exchange for ownership in the company or convertible debt (a loan that can be converted into ownership in the company).  Once your business has a more proven track record, you may be able to obtain a bank loan or venture capital funding.  Banks generally require significant financial information and collateral.  If you are unable to obtain bank financing, you may want to try to obtain a guaranty from the Small Business Administration (SBA). The SBA won’t give you a loan, but if you are approved, the SBA will guaranty a loan given by a bank, which will increase the likelihood that a bank will be willing to give you a loan.  Venture capitalists may be an option for businesses that already have revenue coming in, and are growing fast.  Venture capital investors can help get you money and provide expertise in management and your industry. Venture capital investors are often looking to recover their investment within three to five years.  These sources are usually difficult to obtain if you don’t have good steady cash flow.  And that’s when business owners look to the new types of financing options.

Other traditional options include using a credit card to finance start-up costs, which is easily available, but carries a lot of expense with the high interest rates charged on credit card balances.  Other entrepreneurs take out a home equity line of credit to fund their business.  This line of credit is easier to obtain if you do own a home, but does put your home at risk.

New Financing Trends

Alternate Methods for Funding A BusinessThere have been several new trends in funding small and startup businesses.  Some trends (like crowdfunding) are new concepts, others have been available for a while and have more recently gained popularity.  Many new business owners are using their retirement funds to finance their new ventures (Rollovers for Business Startups (ROBS)).  This allows an entrepreneur to fund a business with his retirement funds without taking a taxable distribution.  There are companies that can facilitate this process, but this does put your retirement savings at risk.  Crowdfunding is a new option.  Crowdfunding sites (like Kickstarter and Indiegogo) allow you to raise small amounts of money from a lot of people, if you are able to interest them in your new company.  Crowdfunding offers different options.  Some crowdfunding sites let businesses raise money in exchange for rewards or products.  Other sites allow businesses to sell shares in their company.  Crowdfunding is an option in early stages of a business when traditional sources of funding are not usually available.  However, keep in mind that Crowdfunding makes your ideas and business public. So, if you need to keep this information confidential, this is not a good option for you.

We Can Help Your Business Purchase Process

At Corporon & Katz, LLC., we are experts in all aspects of business law, from contracts to purchasing and selling we can help.  If you are considering buying a business and are not sure how to proceed or want some help determining the right financing options for your purchase, please contact us today.  We can help

(1.) There are different kinds of business you may want to buy—an existing business, a franchised business, etc.  For purposes of this blog,  I have not distinguished between the different types of businesses.