We wanted to revisit the issue of owner financing for one major reason:
It might just be the last way (and best way) for a budding entrepreneur to purchase a business these days.
Face it – banks are not lending to those seeking to purchase a business and, to even get them to look at your deal, you better have twice or three times the collateral in relation to the potential loan amount (regardless if the business is extremely profitable or not) – and just because they might look at your business loan request does not mean they will approve it.
Even non-bank lenders are not lending for the purchase of a business unless it comes with a huge amount of real estate and then they will only fund based on a small loan-to-value of that real estate.
That leaves two options for most people wanting to buy the business of their dreams:
1) Friends and Family (what some call Friends, Family or Fools). However, unless you have a very rich uncle, most of your friends and family are also facing financing restraints and either will not or cannot help you make a big purchase like buying a business.
2) Owner financing. Where the current owner of the business is willing to sell it to you on terms (meaning they – not the bank – hold the note).
This is what we will discuss here – as this might really be the only way left to purchase a business today.
Owner financing can benefit the purchaser (you) in several ways:
1) Easier to qualify for as you don’t have to jump through all the hoops that banks or lenders will make you jump through like cash flow analysis, property appraisals, debt-to-income ratios, personal financial statements, etc.
2) Better terms than most banks will offer – thus, saving the new owner (the purchaser) both time and money – not to mention less in regards to reporting (ongoing financial statements and tax returns) and fewer covenants.
3) More than just financing, since the current owner still has a stake in the business’s success, they will provide invaluable guidance and advice well into the future.
Plus, if the current business owner believes in the business (and you can get them to believe in you) – this should be a no brainer for the owner. If they hesitate without giving a very good reason, that might be a red flag to you as it might show that the current owner does not believe in the long-term viability of the business (they know something is wrong or in decline).
Let look at an example to show how owner financing works:
Let’s say you find a business for sale – a business that you know you will have the necessary passion to work hard at and grow beyond where it stands today.
The price of the business is $100,000 – yet, you tried to get a bank loan, a SBA loan and even a non-bank loan and have heard nothing but “NO.”
Here is where you approach the current business owner and entice them to sell you the business while carrying the note.
How your deal should work:
You tell the current owner that you will provide some down payment (this is to show good faith as well as provide a little cash incentive to the current owner).
This down payment should be around 10% but could be less depending on how much you can raise. But, raising $10,000 is much easier than raising $100,000. Plus, any bank or non-bank lender would require you put up more than 10% – so 10% is really a win for you!
Now, if you put 10% down, that means the current owner would have to finance the remaining 90% or $90,000.
Here is how to approach that:
State that you will pay both principal and a comparable market interest rate (let’s say for this example – 10% APR) amortized over (7) seven years (choose a term that makes the payments work for you as well as for the current owner).
But, you will also include a balloon payment in (3) three years – allowing the owner a full exit if necessary.
The longer term (7 years) gives you breathing room by making your payment affordable (the longer the term, the lower the payment).
The balloon payment (meaning that even though the loan amortizes over 7 years, the remaining balance after 3 years will be due in full – the balloon term) gives the current owner a way out in a short period as well as provides you time (3 years) to establish yourself in the business – so that when the time does come, you have a track record that you can take to the bank to finance that balloon balance.
Plus, if both of you are happy with the way things are going; you can always refinance the balance (balloon) with the current owner at the 3 year anniversary date.
Now, if agreed, you get the business (what you were working for to begin with).
The current owner not only sells the business – but, (given our example above) earns $22,700 in interest above the original purchase price – interest that you would have paid to the bank anyway if you were approved for a bank loan – might as well pay it to the current owner.
From our example, your monthly payment would be around $1,500 a month – very affordable and at the 3 year balloon date, the reaming balance would be approximately $60,000 – much easier to get a business loan approved for than the original $100,000.
In the end, you, as the new business owner are no worse off and now have bought yourself some time to show both the selling business owner and the banks that you are a true success.
The other side:
Why, you might ask, would a current business owner, looking to get out of the business, be willing to owner finance?
Two main reasons:
1) The business owner, given this economy and the fact that banks are not lending, might not be able to sell the business any other way.
2) The business owner benefits additionally as he/she receives not only the principal from the loan (what they wanted in the first place) but will also earn interest from the financing as your interest payments go to them and not the bank (e.g. major selling point).
In good times, for a business to succeed, the business owner has to be creative in all aspects of the business. In bad times, like now, to be a successful business owner, you have to get doubly creative, especially when it comes to financing.
If you have no other choice or options, it never hurts to go to the current owner and ask them to finance – what do you really have to lose?
Just come prepare with a deal that benefits both you and the owner because owner financing just might be the best and last way to finance a business purchase today.
Every child grows up dreaming about what they will be in life, some desire to be teachers others doctors and some firefighters. When college students make a career choice they may take years and may change their major multiple times. As a sophomore at the University of Wisconsin Oshkosh I believe the most useful major that a young person can choose today for a career in the future is a finance degree. A finance degree will allow a person to have the knowledge on how to effectively control their finances, give them vast employment opportunities, and allow them to contribute to individuals and the economy.
Graduate students will have the knowledge to make decisions about college debt, their first major investment, and future retirement plans. Finance degrees will help provide a healthy and relaxed marriage as many divorces and unhealthy relationships between spouses are due to disagreements over financial decisions. Parents with finance degrees will be able to make critical decisions about their children’s college funds, mortgages, and investment opportunities. The knowledge one uses to make decisions at home will help them bring real life examples to job opportunities they will have in the workforce.
Finance majors will have the opportunity to critically search the workforce for the best available employment. The field of finance is one of the fastest growing occupations over the last few years. This demand is resulting in higher starting salary and excellent benefits. Many college students’ worry how they will find employment and deal with the real world. Students with a finance degree will be optimistic because of the high job placement this career offers. Also finance majors will have an edge because they will work with different topics concerning the economy on a daily basis.
Finance majors have the responsibility to guide individuals and businesses to the best possible investment decisions for the future. They are required to be comfortable and up to date with the economy in order to guide others to secure financial decisions. Individuals must trust financial advisors to help them make choices about the assets they depend upon to survive. The main goal of a financial advisor is to provide all types of people with the guidance they will need to live a happy and enjoyable life.
As I plan for the future I realize the financial struggles my family must overcome. My dad has struggled finding employment and with me and my older sister in college it has been a burden for parents to help fund our tuition. The upcoming years will not be any better with my younger sister beginning college and my youngest sister continuing to attend day care. Despite these financial difficulties, I am determined to relieve this tension off our family. As I move on with life I will continue to use my strong work ethic to overcome this financial challenge. These challenges are exactly why a degree in finance is the best possible degree a young person can choose for the future.
Why is it so many of us hate the idea of living a budget-based life? I suppose it’s because living within a budget feels like we are depriving ourselves of some of the good things in life, when actually, a budget can bring the good life even closer. Whether you are purchasing new clothes, a new piece of furniture, or a new automobile, the power to purchase anything you want, whenever you want, with little thought to paying for it in the future, is getting to be a real problem with debt these days. Financial pundits calculate that almost every American household is bearing between $4,000 and $9,000 worth of credit card debt alone! It seems there are few people who live within their means anymore.
Today’s spendthrift has no time for a budget that might restrict a purchase. Budgets might appear outmoded, but the fact remains: budgets do have benefits: A Budget Can Reduce Marital Strife. Statistics show that money problems can cause divorce. Debt causes more arguments and stress in the household than just about anything else. Discovering how to responsibly use your money together can assist in building a better relationship. A Budget Can Help You Build For The Future. Sooner or later, everybody needs a nest egg. Whether it’s for a householders emergency; or to settle unexpected medical bills; to put your kids through school; or to use in your retirement, we all need to put a percentage of our income away for the future. A lot of investment experts advocate putting away at least 10% of your net worth into several different accounts. Budgets Can Make You Feel Good.
There Is nothing quite like the feeling when you start to strike off bills from your expense list each month. Paying off consumer debt; confronting long-running loans; and saving for something special, can all assist in building your self-confidence and your feeling of self worth. Budgeting does not just aid you take charge of your finances; it helps you take charge of your whole life! To sum up, these are just some of the numerous benefits that making and sticking to a good budget can bring you. Personal debt has become a major problem for many people. Taking control of that debt, and learning to exist inside a reasonable budget can be very rewarding.
If your car insurance is due for renewal and you are considering buying another policy then this article will provide you with important facts that you should know about. Car insurance policies are getting increasingly expensive and you should do all that you can to reduce your costs. How much you have to pay for your car insurance is dictated by a variety of factors as they apply to you and your vehicle.
In this article we will examine coverage limits, your age, gender and marital status, your location and insuring other household members. All of these factors will have a great influence on how much you will have to pay for your policy.
Coverage limits are generally dictated by the price that you are willing to pay for your insurance. A higher level of coverage will generally result in higher premiums. The best way to find a good value policy is to comparison shop. Nowadays it is generally accepted that the best way to do this is by using a car insurance comparison website.
Your age, gender and marital status will have a great effect on the auto insurance rates that you are offered. Insurers rate drivers using a variety of criteria, if you are a young single male driver you will usually have to pay higher rates. If you are a middle-aged female married driver then your rates will be lower. Insurers calculate the best car insurance rates for you by comparing levels of risk. Those groups which are statistically more likely to be involved in an accident have to pay correspondingly higher rates.
Location plays an important part in deciding how much your premiums will cost. Drivers who live in an urban environment will usually pay more than those from a rural area. This is because drivers who live in cities and heavily populated areas are more likely to be involved in an accident, or to have their car stolen or vandalized. Insurers generally offer better rates if you’re able to demonstrate that you keep your vehicle in a garage at night. You may also be able to improve the security arrangements of your automobile by fitting an alarm, immobilizer and steering wheel lock.
Insuring other household members will have an influence on the cost of your policy and the best car insurance rates that you offered. If you have teenage family members living with you and they are added to your policy, then your costs will increase. This may still work out cheaper than if your teenage driver were to have a separate policy in their own name.
In conclusion, there are a variety of different factors which can affect your ability to be offered the best insurance rates. Some of these are coverage limits, how old you are, whether you are male or female and whether you are married or single. Your rates will also be affected by the area where you live and whether other household members are included in your policy.