When it comes to being approved for both business and personal loans, you can be certain that a bank will want collateral. With said collateral, your bank becomes less concerned that they’ll be left high and dry when the loan remains unpaid. With a lack of collateral, many budding business owners are held back by the fact that they lack the collateral needed to buy a business. Though luckily, there are ways that one can buy a business without having any type of collateral or very little.
The Small Business Administration (SBA) is the first stop for those wanting to buy a business with a low level of collateral. The SBA’s 7 (a) program provides banks with incentives to make loans to buyers. These buyers can buy a business in any state such as Illinois or Indiana, etc. By utilizing this program, the SBA will provide a guarantee for a whopping 75% of the loan amount, but the borrower still has to have the remaining 25% in some cases, but perhaps as low as 10%. To put it into perspective, this would mean that on a $1 million dollar business, the borrower just has to come up with $250,000 max in most cases, but often times much less.
Through the SBA’s 7 (a) program it opens up the possibility for prospective business owners to consider businesses that may have been out of reach otherwise. Anyone looking to become a first-time business owner will want to fully explore all that the SBA’s 7 (a) program has to offer as they even hold a second aspect to the program which allows the cash that is fronted for 10-25% of the loan to be from an investor or provided to the borrower as a gift.
Another option one could look into would be seller financing and it’s certainly not as rare as many suspect. This method of financing is actually quite common. If sellers are motivated, they are much more willing to consider seller financing. Those motivations could come from a variety of reasons such as retirement, unexpected personal problems, or just burnout. There is also the possibility that seller financing and the SBA’s 7 (a) program could be used together. Which in turn could greatly increase your chances of buying a business. Now of course there are still potential obstacles or limitations to consider with the SBA’s 7 (a) program. For example, the program requires that sellers cannot receive any form of payment for a full two-year time period in most cases.
But all that to say that a lack of collateral doesn’t have to mean the end of the dream of owning a business. If you are interested in owning your own business and lack collateral, meet with a consultant at S.C.O.R.E. and other experienced professionals, such as a business broker or M&A advisor. An experienced brokerage professional will have a wide array of ideas for how to buy a business with little or limited collateral.
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