Options for Small Business Financing
Buying a business can take time, energy, and some detective work. It is important that you do your homework to ensure that you buy the right type of business and that you pay a fair price for it.
Once the acquisition target is identified entrepreneurs often report that getting financing is one of the most challenging aspects of acquiring and growing a business. If you are looking for money for your business, you should start by learning about the different types of financing that are available and assessing which one is best for your needs. You can also reduce your need for loans by preparing and managing your financial situation in the months leading up to your acquisition.
The process of sourcing the type of financing that is best suited to your current situation can be exhaustive. At our business brokerage firm, our objective is to present a few of the more common financing opportunities that are available for mid-market companies in Canada.
First and foremost most individuals and new entrepreneurs that are looking to make a small business acquisition use a large amount of their own money and assets to finance the purchase and get their business off the ground. These assets are usually cash-on-hand or short-term investments that can be easily liquidated, and usually provide the backbone for any small business purchase. Some of the types of personal assets that you can use to finance your business include money in your savings account, stocks, mutual funds, bonds, or other investments, as well as any personal property that you can sell. The purchaser may also receive some sort of a loan or investment from family members or close friends.
Funding the acquisition with some of your personal assets also shows prospective lenders and investors that you are personally assuming some risk, and are committed to the future success of your business. The majority of lenders and investors want to ensure that you have a personal stake in the success of your business, before agreeing to give you money.
Private sector financing
The second most common type of financing that is available for small business acquisitions is private sector loans from a commercial bank. Private sector lenders and investors provide loans and financing in order to earn a return on their money. They decide whether to provide your business with financing based on an assessment of the risks and potential rewards of doing business with you. The way that private sector firms will assess the risk and reward of providing you with financing depends on their business model and the type of financing that they offer. Many options exist within private sector financing including short and long-term loans, commercial term loans, as well as lines of credit.
The major commercial banks offer Canadian Small Business Financing Loans (CSBFL), to provide the financing you need to get a business started or help an existing business grow. TD Bank and Royal Bank both offer the CSBF loans, which are designed to help businesses purchase, install, renovate and modernize business equipment and other fixed assets. The Canada Small Business Financing Loan can provide a Canadian business with up to $500,000 in financing for the purchase of land or business premises, or $350,000 for leasehold improvements and equipment.
The Business Development Bank of Canada (BDC) is also a great source of small business acquisition financing. Their mission is in line with the objectives of their clients as it is to “help create and develop Canadian businesses through financing, venture capital and consulting services, with a focus on small and medium-sized enterprises (SMEs).” They offer a number of unique business transition financing solutions which include longer repayment periods as well as customized repayment schedules.
For those looking to make an acquisition, it is important to consider the financing options that are out there for you. Once you recognize a firm acquisition target it is critical to have a sound idea of the type of financing you might require for the opportunity. The range of loans that are available means that it is important that you do your own due diligence on the process and ensure that not only that you have the proper financing in place, but also that it is best tailored for your situation.