Alternative business purchasing methods to SBA loans?
March 06, 2023
by a searcher from The University of Michigan - Stephen M. Ross School of Business in Mesa, AZ, USA
I am very much in the learning phase of my acquisition journey. I appreciate all the helpful tips and guidance I've received at this site. I had previously posted a question on SBA loans, and many suggested I avoid that route. So now I wonder, what are the alternatives to buying a business with an SBA loan and what are the pros and cons of those alternatives?
from Hofstra University in Melville, NY, USA
- Debt -
SBA (you know this)
Bank loans (very hard to get)
PE/Hedge Funds - Many of them will lend on spaces they understand, often with a Mezz/Equity component. Size often needs to be significant
Seller Note also called Seller financing.
Mortgage - if Real estate is attached to the deal
Leasebacks - For Hard assets in already in the business.
Equity -
Buy most of the equity and leave previous owner in for a piece (very deal specific)
Silent investors - including family/friends rounds and rolodex. Sometimes preferred return plus equity. Can also due this through warrants, but its more of a debt instrument then.
Institutional investors - If they invest in space, they may be willing to take a minority position. Will come with board seats. Could also be family offices in space.
Other -
Earn-outs. I use as much as possible use this if the cash flow supports it. Its also a helps bridge gaps as sellers always seem to think their business will have upswings in the coming year.
from California State Polytechnic University in Pomona, CA, USA
Seller financing, mezz financing, conventional loans, investors, etc. There are a bunch of ways. I saw your other thread and only caw one that I believe was down on SBA due to the personal guaranty.
Do you believe in what you are doing? If so, why the avoidance of a personal guarantee?
I believe the SBA route is the most common and can provide you with teh most up-side in the way of retaining equity in the deal. If you believe in the deal then go the SBA route. The default rate on SBA loans is minimal and if you structure it correctly they are a powerful way to finance an acquisition.
If you want less risk you could go with a traditional search fund or even a solo-sponsor model.