Financing Facts
There still aren't too many ways to finance the purchase of a business. Here are the primary methods:
Buyer Financing:
Some buyers may have the cash available to purchase the business. Some may elect to use equity in their residence or other real estate. Others may have other assets that they can sell or borrow against.
Bank Financing:
Banks may lend against a buyer's assets as described above. They may also lend against the assets of the business, assuming there is sufficient value to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by business owners have very little relationship to the actual earning power of the business.
Venture Capital Firms:
These firms do not, as a practice, lend to small or even many mid-size businesses unless tremendous growth is anticipated. They also usually expect an equity position in the company.
SBA Loans:
What is the SBA? The SBA is the United States Small Business Administration that has been in existence since the 1950's. The 7a SBA program allows customers to obtain financing for a variety of reasons which includes business acquisition financing. This financing allows banks to offer more favorable terms than are normally available. In fact, some banks offer terms of up to 10 years with no balloon payment and no prepayment penalties on these business acquisitions. In addition, business acquisitions that include the commercial real estate can be financed for longer fully amortizing terms.
SBA have become more popular. There is now some competition among lenders for these loans. Many banks offer them, but the preferred SBA lenders seem to have the upper-hand in both acceptance and service.
For more on SBA loans, visit the U.S. Small Business Administration website.
Other Sources:
This category includes family, friends. credit cards, and leasing companies. Some suppliers have been known to assist in the financing of a small business.
Seller Financing:
This is, by far, the largest source of financing available for the purchase of a business. Many industry experts say about 90 percent of small businesses sell with, or perhaps, because of, the seller financing a good portion of the sale price. Buyers have much more confidence in the decision to purchase a business when the seller is willing to assist in the financing. The buyer has confidence that the seller believes that the business will service the debt, in addition to providing a living wage.
(This information was taken from the Today's Business Scene newsletter copyright 2001 Business Brokerage Press)
The Necessary Paperwork You Need to Hand in an SBA Loan Application.
Copy of Purchase contract
Copy of Purchase contract
List of all corporate officers and their titles
Document Checklist in Order to Close on an SBA Loan.
The easiest way to show proof of your cash injection into your business is to supply us with copies of the following from your individual/personal bank account:
Another way of showing proof of cash injection can be used when paying bills or making purchases on behalf of the business. If this is the case, the injection must also be documented by providing the following:
Insurance Requirements:
Life insurance on the life/lives, each in the amount of the loan (for a total amount of ______ to be collaterally assigned to the lender. (Lender or lenders agent must be in possession of the original policy prior to closing)
Collateral assignment of Life insurance policy(s). You will have to contact your agent to obtain an assignment of benefits/proceeds form for the policy-this form must be completed and filed with home office of your insurance company in favor of the lender.
Life insurance Instructions:
A complete copy of the life insurance policy(ies) on the life/lives of the borrower(s) at least in the amount of the loan, as defined in the conditional commitment letter and SBA authorization and the loan agreement must be received by the lender, prior to closing. Decreasing term insurance is acceptable.
Borrower may use existing life insurance to meet this requirement.
Note: Life insurance policies used as collateral for this loan may not be group policy(ies) or government policy(ies). In addition, lender cannot be named as beneficiary on the policy(ies).
You will have to contact your agent or insurance company and obtain an assignment of life insurance policy as collateral form for the policy(ies) which is approved by your insurance company. Please execute the form, have your signature notarized, if required, and return to your agent who will forward the document to the home office of your insurance company.
This form must be filed/recorded with home office of your insurance company. the endorsement should list the lenders legal address.
(Personal Property) Evidence of hazard insurance coverage on all collateral in the full replacement cost/maximum insurable property located at your address. Lender is to be named as mortgagee insured in first position.
(Personal Property) Evidence of flood insurance coverage, if applicable, in the full replacement cost/maximum insurable value on real property located at buyer's address.
Prior to closing, Lender requires evidence of hazard and liability insurance on collateral property for the full value on all pledged assets. Fire and extended coverage insurance must contain a mortgagee clause for lender similar in character to the "New York standard mortgage clause". General liability insurance in an amount satisfactory to lender (minimum amount of $1,000,00) is also required.
Endorsement: To the lender
"Loss payee" on contents coverage, "mortgagee/loss payee" on building coverage and "additional insured" on general liability.
The binder /certificate of insurance should contain the following information
The name and the address of the insured.
The name and mailing address of the certificate holder (Lender)
Location(s) of the operation(s) of the insured
Description of property or equipment insured
Description of coverage, including:
name of insurer,
policy numbers,
policy limits,
deductibles,
expiration date of policy and,
any special conditions or extensions of coverage in affect. i.e., property certificates – loss payee, and mortgage endorsements, all risk or special form coverage liability certificates – additional insured endorsement, occurrence form coverage.
Should include written notice to the lender 30 days prior to cancellation or material change in policy wording.
All hazard insurance policies must contain the following clause "The interest of the lender and the SBA shall not be invalidated by any act or neglect of the mortgagor or owner of the insured property"
Authorized signature of the borrower's insurance agent or carrier and date
(General Liability) Evidence of liability insurance for the borrower in the minimum amount of $1,000,000. Lender is to be named as loss payee/additional insured.
(Worker Compensation) Evidence of Worker's Compensation insurance for the borrower as required by applicable Florida Statutes.
Please note: The following Lender's loss payable endorsements is required on all insurance policies.
A closing cannot be scheduled until all items in this checklist have been received and deemed to be satisfactory by the lender.
Please note that this checklist is an overview of the information required by the commitment letter and does not constitute a final binding list of items which may be required by the lender prior to closing. All questions regarding the above documents/information should be addresses immediately to lender's counsel to ensure a smooth and efficient closing
Required information for Landlord:
Legal description
