What Financing Options are available for Buyers in Florida?
Business owners in Florida, who have never sold a business, assume it should be as easy for a business buyer to get financing to buy a business as it is to get financing to buy a home. Unfortunately, that is not the case.
There are only 4 Viable Sources for Financing to help buyers buy a business in Florida.
- SBA ( Small Business Administration) financing.
- Seller Financing
- Buyers borrow against their 401K/IRA plans
- A buyer uses home equity to get a 2nd mortgage (HELOC)
1. SBA Financing
Businesses in Florida that qualify with good books and records can usually get SBA financing. The SBA is a US Government agency that encourages small business ownership BUT does not actually loan the money but guarantees the loan made by a bank.
For a seller, whose business has good books and records – I can get the business pre-qualified for an SBA loan.
Pre-qualification is important because:
Pre-qualification means the SBA bank has already thoroughly reviewed all the tax returns up front- and has agreed to loan up to 85% of the sale price to a qualified buyer.
2. Seller Financing
It’s a shocking fact that over 80% of all businesses that are listed for sale under $1million in Florida will require seller financing – or it won’t sell. Only about 20% of all listed businesses for sale will qualify for a SBA loan, the rest might require seller financing.
Lenders (Banks and credit unions) will not loan money for the initial purchase of a business in Florida – PERIOD!
Most sellers find that hard to believe so I offer these analogies:
- What happens when you don’t pay your mortgage? The bank forecloses on your home.
- What happens if you don’t make your car payment? The bank repossesses your car.
- If a bank loaned money to buy a pizza place and the buyer defaults – what does the bank do with the pizza place?
A seller is not required to offer seller financing, but it greatly increases the chances of a quicker sale. Seller Financing will usually require a sizable down payment 0f at least 50%. Depending on the price of the business, a seller can require both a credit report and personal financial statement from the buyer requesting seller financing.
3. Borrow against their 401K/IRA plan
It is possible for a buyer to borrow against their 401K/IRA plan in order to buy a business. The program is called a ROBS (Roll Overs as a Business Startup) administered by specialized financing firms. The fee to set up a plan is about $5000 and requires strict compliance to rigid IRS rules to avoid penalties.
4. A second mortgage on a home
If a buyer has sufficient equity in their home, a bank will loan the money to buy a business.
The loan is called a HELOC (Home Equity Line of Credit)
