Get Creative with Small Business Financing
Whenever I’m asked about financing a small business and especially about capital raising to buy an online business, I can’t help but think of the well known saying “A Banker is a man who will loan you a Brolly (umbrella) when the sun is shining, but he’ll ask for it back the minute it begins to rain!”
I first heard this attributed to Winston Churchill, but I have to admit (reluctantly because I’m a Brit), I think it was actually said first by Robert Frost, either way, I find it to be sadly, all too true, and at the same time not really surprising.
Bankers are tasked with holding our deposited money securely and ensuring it’s available whenever we may have need or desire to withdraw it. They’re therefore also tasked with ensuring that they only loan said deposited money to those who can easily repay it. Hence the other saying which I believe came from Bob Hope (I just know a disgusting percentage of under 30’s are now off to Google Bob Hope!) “A bank is a place that will lend you money, but only if you can prove you don’t need it.”
Are You Buying More Business Than You Should?
I think first and foremost you need to address why you need seller financing to buy the business. You really want to avoid being like the actress with a fur coat but no knickers, you want to be sure you’re not buying something you can’t really afford! So consider maybe starting out a little smaller with something you can finance yourself and build. One of the biggest advantages of doing business online, especially once you get things properly set up and automated, is that you can very often run and grow more than one at a time.
Are You Asking Too Much Of The Seller?
If you’re a seller and you’ve built a good business, have solid, verifiable income and expense records, decent traffic history with established vendor and customer relationships, why on earth would you give up 100% control of your business to a total stranger for anything less than 100% of its value?
Well, almost shockingly, there are actually good, sometimes very good, business opportunities with seller financing available. Good ones are typically few and far between but there can be extenuating circumstances such as the seller has another opportunity and needs to cash out to take advantage of that, but the business doesn’t have enough ‘age’ on it yet to have reached its full potential.
In my experience, you’ll always get the best ‘deal’ when you are financing a business yourself or at least outside of the basic negotiation.
What Are The Options?
So what’s an entrepreneur to do when they’re looking to finance their purchase of an online business and the bank has effectively said “no way are we funding your fly-by-night web biz dude” or the typically much more verbose but still dismissive banker equivalent of it?
Let’s invite a little sunshine into this conversation by saying all is not lost here, there are still quite a few options you can tap into to realize your dream of owning an online business!
Sell your stock portfolio (that baby from the eTrade ad’s can show you exactly how), cash in your 401-K (that’s a Private Pension for those not familiar with the US vernacular), take a second mortgage on your house (back to the Bankers for that one – but they’re much more picky than a few years ago before they drained the housing and financial markets faster than the entire cast of Twilight on a major binge) hmm none of those find the sun shining on your parade yet?
As a last resort you could always tap your friends and family for a loan, but if that too strikes you as NOT quite the perfect raft on which to launch your entrepreneurial voyage, read on to learn more about seller financing and how to go about trying to land some.
Cash is always going to talk loudest to a seller but if you absolutely must look for seller financing, it’s essential to approach it as if you are approaching a bank for a small business loan.
You really need to prove you’re a good risk and offer some sort of security such as a Promissory Note PLUS and maybe even further financial benefit to compensate the seller for the additional risk they’re assuming should you default on the loan for whatever reason.
This type of financing structure and approach has the best chance of a seller giving your offer serious consideration.
What Are Holdbacks?
Another more common reason to justify asking for seller financing is if/when there are legitimate concerns regarding some aspect of the business itself or to secure the sellers compliance with terms and provision of transitional training. Either of these situations would warrant a financial mechanism (usually a holdback) to mitigate the risk of a buyers concerns whether they are justified or not – but it’s still really a form of Seller Financing albeit short term.
What Are Performance Based Earn-Outs?
If there is some justifiable reason or concern on the part of the buyer but he can convince the seller he (the buyer) is capable of overcoming it then a seller may agree to take some cash up front (allowing them to move forward with a new project) plus a specified percentage of profits from the business you’re buying until a pre-defined value cap is reached. This can also be for a specific period of time but then how much the seller will realize is dependent on the buyer’s ongoing success running the company, so there’s additional risk there too.
Either of these options will usually provide the seller with the ability to ‘potentially’ make more than the asking price as compensation for taking on the risk. If the seller is a bit more risk averse they may prefer to ask for a promissory note, kind of like a bank would but in this case the seller IS the banker – expect to pay interest on the loan, make regular payments on make them on time or they may end up owning your new business all over again.