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.

Lenders (Banks and credit unions)  will not loan money for the initial purchase of a business in Florida – PERIOD!

There are only 4 Viable Sources for Financing to help buyers buy a business in Florida.

  1. SBA ( Small Business Administration) financing.
  2. Seller Financing
  3. Buyers borrow against their 401K/IRA plans
  4. A buyer uses home equity to get a 2nd mortgage (HELOC)

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 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:

  1. Pre-qualification means the SBA bank has thoroughly reviewed all the tax returns up front- and has agreed to loan up to 90% of the sale price to a qualified buyer.
  2. Businesses that have been pre-approved by the SBA increase the likelihood of a quicker sale.
  3. The advantage to the seller is that with SBA financing the deal becomes a cash sale.

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.

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 50-75%. 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. In addition, the seller and buyer will meet before an offer is made to allow a buyer to ask questions about the business. If that meeting does not create a good comfort level for the seller – my advice is – don’t offer the seller financing.

I will always advise a buyer preparing for that seller/buyer meeting – it behooves a buyer to make a good first impression.

What are the benefits to the seller to offer Seller Financing?

Sellers in Florida sometimes are unnecessarily worried about offering seller financing until they understand the advantages they hadn’t considered.

Advantages:

  • seller financing increases the chance a business will sell quickly.
  • the seller gets 6% interest on his note – about 3x what banks are currently paying
  • tax liability is considerably less, only having to declare the down payment amount – not the entire sold price amount.
  • total proceeds from the sale will be considerably higher considering the total interest paid on the note.
  • monthly cash flow from the payments, up to several years eases the abrupt loss of monthly income after the sale of the business.
  • creates full security and collateral for the seller.
  • the seller remains on lease with the landlord – if buyer defaults – the seller can change the locks, keep all monies paid and resell the business.
  • the seller can sell note on the secondary market later if the need arises.
  • seller financing demonstrates the sellers’ confidence in the future and longevity of the business.

IMPORTANT NOTE

In over 10 years of selling businesses in Florida, I’ve only seen one default. Buyers making a 50-75% down payment will not intentionally default on a note to the seller.

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.

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)