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American Business Financing Methods


Business financing means that the business-related activity requires capital funding to buy the business, to expand a current business, or to operate the current business.

In order to buy a business you need financial assistance. As per your contract or agreement you may put some amount of money down as a down payment and such an amount may come from your savings account, gifts, or the sale of another property, etc. In order to fulfill the purchase of a business and obtain ownership of a business you need financing assistance. Currently there are four methods of financing available and you choose which one works for you.

Traditional Financing


This is one of the oldest financing methods available in the world, and even in the current market it is the most common financing for the majority of business sales. Traditional financing is also called Seller Financing (SF) or Seller Carry Note (SCN). This is one of the easiest and fastest methods of financing. Typically the buyer will fund the down payment which will be negotiated between the seller and buyer. The difference will be carried by the seller. In most cases the note will be from 3 to 5 years and the rate of interest will be set by the seller. In reality, before a seller considers the buyer’s request, the seller will review the buyer’s experience, tax returns, credit scores, source of down payment, additional collateral, etc. The biggest advantages of this kind of financing are quick sale, seller will have lien on the business, regular monthly payments to the seller, seller retains a vested interest on the business, buyer comfort, and the ability for the buyer to get help from the seller who developed the businesses. The only problem with these kinds of loans is a bigger down payment such as up to 50 to 60% of purchase price i.e. the loan amount will be lower than the loan to value (LTV). The seller can also demand additional collateral besides the lien on the business.

Government Financing


Small business loan programs are provided by the government to encourage self-sustained business and make the country’s economy stronger, as well as creating employment. There are various programs available and under those programs the borrower can apply for the loan. One of the biggest problems is that it is time consuming. There is a lot of documentation, time, and energy hence many small business buyers are not interested as they do not know when they can close the escrow. However this is one of the most highly secure methods as they do evaluate all parties and this protects the buyer from all kinds of sales information. Also, the down payment amount is lower i.e. they go for higher LTV. Sometimes you can buy with 10 to 15% down. Even after the acquisition of a business they can also help with smaller loans for business development, i.e. post business acquisition loans or a business line of credit.

Lender Financing


This is the conventional method of financing from the banks; their loan to value is 60 to 70%. However their LTV is determined by the cash flow and debit service of the business. Most banks are not interested in conventional loans for a business and they encourage the borrower toward government loans. All banks are participating in government programs. But, for someone who has good financial net worth and business experience, it is also a good idea to get a loan from a bank or financial institution.

Private Financing


This is least-used type of business financing and involves a person extending a loan to another person for a business. They offer a higher interest rate and short term financing. They may put a lien on the business and real estate of the borrower and usually the amount being financed is small.

If you want to know more about business financing methods, have further questions about business financing related programs, or need financing assistance resources please contact us at help@bizworldusa.com or 510-556-1600 and one of our approved third party business financial consultants will contact you.