How to Get Money for a Down Payment on an Existing Business
Securing financing for a business purchase is a great challenge. Many banks and investors will not contribute capital to a business purchase until the sponsor of the acquisition has secured sufficient funds for a down payment. Many extraordinarily wealthy individuals simply use their own personal funds for the down payment. For people who do not have the personal capital to contribute, there are a wide range of alternative sources of financing available. The process of securing a down payment for a business purchase can be complex, but the process will be much smoother if you know what to expect.
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Instructions
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Request an asset appraisal, a comprehensive business plan and at least three years of audited financial statements for the company you are interested in purchasing. Any sources of financing will want to see this information before agreeing to invest in the business. A company that is going through a sale process should have this information available.
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Invest your personal funds as a down payment. This is the simplest approach if you have sufficient funds to invest. Make sure that your net worth is sufficiently diversified after using your own funds for the down payment. If you have to put all of your money into the company, you should seek alternative sources of financing.
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Approach friends and family regarding funds for the down payment. Be sure to agree ahead of time on important issues, such as how much influence different people will have with the company and how any disputes will be resolved.
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Contact commercial banks and ask to speak with a commercial loan officer. The bank will ask to see your business plan, asset appraisal and the audited financial statements. Banks will focus on the value of the company's assets (which would be used as collateral) and the company's cash flow statements (which help them determine the company's ability to pay back loans).
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Seek a loan or a grant from the U.S. Small Business Administration (SBA). The SBA is a government entity that provides funding for the operations and purchases of small businesses. The SBA provides loans and grants to thousands of small business owners each year, although the process of securing funds from them is quite competitive.
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Approach equity investors, such as angel investors or venture capitalists. These investors have a higher appetite for risk and will be less likely to focus on the historical track record of the business than banks or the SBA. These investors will require an equity stake in your company, which reduces your ownership in the business. You should have an idea of how much equity you are prepared to give up before entering meetings with these investors.
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Tips & Warnings
There are numerous websites that can provide you with a list of venture capitalists and angel investors in your area. One particularly popular source if vFinance (see Resources).
Some banks or investors may ask you to pledge personal assets, such as your house or personal savings, as collateral for loans. Be very careful in pledging personal assets; if you pledge your house as collateral and your business is unable to repay the loan, you will likely lose your house to the bank.
