Essay on Buyer Financing : Small Business Lenders

Essay on Buyer Financing : Small Business Lenders

Length: 908 words (2.6 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

Seller Financing
Most banks say that they are small business lenders. The missing part of that statement is how banks define small businesses and what banks will lend money for. From the bank 's prospective, a small business is an established business and not a new business. Moreover, banks lend money primarily for tangible assets that double as collateral. Banks rarely lend money to start up a business since there is not a track record of success and when they do, they only lend money for tangible assets. For the most part, banks are very conservative in their lending practices to businesses so they can stay within the rules to maintain their required FDIC insurance. Therefore, when you consider that the average main street business has minimal tangible assets and sells for $350k and the average buyer has less the $100k in cash, where does the other $250k come from if not from the bank? The answer is the seller of course. While the seller would prefer that the buyer secure the full purchase price from other sources, he will often have no other choice but to be the lender to the buyer. Let 's face it– a bank 's only recourse if the borrower defaults on the loan is to sell off the assets of the business, which are often very specialized and not very liquid, for a steep discount. However, the seller could step in and take over the business again since he is familiar with the operations, inventory, equipment, employees, and customers, and perhaps even sell it again.
Most banks work with the SBA to help fund loans and generally involve either real estate or other tangible, yet relatively liquid assets, such as a fleet vehicle. Moreover, only about 20% of all deals are financed at least in part with an SBA loan. This leaves a rather...


... middle of paper ...


...the business exceeds the projected one million dollar in sales for the next two years, the buyer will pay the seller an additional $125k in each of the next two years, adding up the remaining $250k. However, if the business does between $999 and $900k (less than the target revenue), the buyer would agree to pay only $75k instead of the the $125K. If the business does less than $800k, he will make no payment that year at all. Likewise, in an earn out, if the projected target was say one million and the business did 1.5 million, there would an upside to the seller and he may receive perhaps $200k for those years. In the end, an earn out is a effective way to hedge your bets if you are not sure how the business will perform after the sale or if you think the seller is over selling his business.
Have you ever considered buyer finance then buying someone else 's business?

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Financing a Small Business Essay

- For many years, economist viewed entrepreneurship as a small part of our economy. Whether they are students (typically college or high school) recent college graduates, unemployed, or newly retired from one career, today entrepreneurs have a central role in the economy. According to the research I have conducted throughout the semester, an entrepreneur is defined as someone who identifies a business opportunity and assumes the risk of creating and running a business to take advantage of it. Two important characteristics of a businessperson are risk-taking and innovation....   [tags: economy, entrepreneurship, risk, innovation]

Better Essays
1535 words (4.4 pages)

Small Business Administration (SBA) Programs Essay

- As larger franchise continue to grow and take over the market place small businesses find them selves falling behind financially. With recession and the hard times it has created since 2008 small business continue to struggle to thrive and grow. Throughout this struggle the Small Business Administration (SBA) Loans programs have come up with a way to help the small businesses stay afloat. They help small business get access to financial assistant programs that have been create to help meet their needs including, debt, company growth, general company needs and capital....   [tags: Small Business Administration]

Free Essays
1414 words (4 pages)

Essay on Starting a Small Business

- Starting a small business is often one of the hardest things a person can do. Some people start a business out of pure fascination, or even as a hobby. Whether starting a business for personal reasons or simply the grandeur to make loads of money, everybody needs to have a plan. Starting a small business is no easy task and can take days if not months to prepare. The most important aspect to have is the tempura and heart to start a small business, as without passion, no business can succeed. One has to be his or her own boss, make dream, reality and be willing to market and sell a product....   [tags: Business, entrepreneur, informative]

Better Essays
2009 words (5.7 pages)

Financing the Purchase of a Website - The Small Business Administration (SBA)

- Financing the Purchase of a Website - The Small Business Administration (SBA) Reprinted with permission of VotanWeb.com One of the Small Business Administration's primary objectives is to help small businesses obtain financing. Although the SBA itself does not make direct loans, it has set up a number of loan programs to assist small businesses. In connection with most of these programs, the SBA provides guarantees to the private sector lenders who actually make the loans. With this guaranty in place, these lenders will generally make loans for the purchase of websites that they would not otherwise make....   [tags: Sell Websites Buy Websites]

Free Essays
765 words (2.2 pages)

Small or Medium-Sized Enterprise (SME) Essay

- BACKGROUND Small or medium-sized enterprise (SME), of which definition varies in different countries and different economic development levels, normally is known as relatively small business unit in terms of employees, capital and operations scale in compared with large enterprises in the same industry. In spite of the diversity of its definition, SME plays a crucial role in almost every economy, tremendously contributes to economic development, job creation, and social stability. According to Popa (2012), it becomes a common place to speak of SMEs as an engine of economic growth for any European Union country....   [tags: financing, economy, development, investment]

Better Essays
1818 words (5.2 pages)

The Small Business Administration (SBA) Essay

- The Small Business Administration (SBA) In July of 1953 the United States Congress amended an act called the Small Business Act. Many believed that the essence of the American economic system of private enterprise is free competition. Also, that only through full and free competition can free markets, free entry into business, and opportunities for expression and growth of personal initiative and individual judgment can be assured. Thus, the Small Business Act was amended. In order to carry out the policies of this Act there was hereby created an agency under the name "Small Business Administration"....   [tags: GCSE Business Marketing Coursework]

Better Essays
1653 words (4.7 pages)

Essay about Strategies For Funding A Small Business

- Pathways to Funding a Small Business Starting a new business can seem like a monumental task from the first vision to completion. An area that must be taken seriously is that of how an entrepreneur will finance their operation. Consideration should be given to the type of business, the amount of owner invested capital and the entrepreneur’s history of previous successful ventures as well as failed attempts. This is important if those involve a financial loss, or they have resulted in current debts....   [tags: Finance, Management, Entrepreneurship, Debt]

Better Essays
1430 words (4.1 pages)

Financing the Purchase of an Existing Website Essay

- Financing the Purchase of an Existing Website Reprinted with permission of VotanWeb.com If you're thinking about buying a website, you'll be pleased to learn that financing the purchase is generally quite easy. In fact, it's far simpler to get the money you need to buy an existing website than it is for a start up. Most people simply don't realize how to do it. Don't get the wrong idea: you're not going to buy a business, at least a good one, with no money down; that only happens in the infomercials on TV....   [tags: Sell Websites Buy Websites]

Free Essays
479 words (1.4 pages)

Decisions Small Business Will Face in 2005 Essay

- What are some of the important financial decisions that small business owner will face in 2005. There are numerous issues such raising capital, accounting and bookkeeping, cash flow management, poor inventory management, over investments in fixed assets, poor credit arrangements, unexpected growth, and other economic factors that will affect a small business’s finances. The U.S. Small Business Administration has seen lots of small businesses com and, unfortunately, go. According to the SBA, over 50% of small businesses fail in the first year and 95% fail within the first five years (“Why Small Businesses Fail”, 2005, p....   [tags: essays research papers]

Better Essays
691 words (2 pages)

Finding a Source of Finance for Used Book Store Essay

- Finding a Source of Finance for Used Book Store The partners of the Used Book store are looking into other logical sources of funding for their business. Currently they are receiving funding from a rich relative. For independence, longevity, and success, they feel they need to research other avenues of funding. There are several different types of funding available to them, but they must decide which source would best suit their needs, whether it is remaining with the rich relative or some other source....   [tags: Credit Finance Business Financing]

Free Essays
1376 words (3.9 pages)