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Traditional Financing
You can get a loan from many banks. You must have a good credit rating, some liquid capital available, and a strong business plan, as banks tend to be conservative in who they award business loans to. With that said, bank interest rates tend to be competitive. Some franchisors will help you prepare your business plan so it reads well and is convincing.
SBA-Backed Financing
The Small Business Administration (SBA) offers SBA-backed loans. These extremely popular business loans can be obtained by many individuals who do not qualify for traditional financing options.
Investing Your Retirement Funds in a Business
There are several innovative companies that will roll your 401K or other retirement plan into a business loan. There are no penalties associated with this type of retirement fund conversion. This type of loan enables you to invest in a business without mortgaging your home or using your property as collateral.
Home Equity or 2nd Mortgages
If you feel comfortable and confident in your decision to purchase a business and own enough of your home to take out a home equity line of credit or second mortgage, this option can be a simple way to obtain the necessary cash to finance a business. You will not need a business plan to obtain this type of funding.
Other Sources of Non-Traditional Financing
With the popularity of business ownership increasing, there are more and more financing options available to meet your needs and preferences. For example, with solid credit, you may be able to obtain a business loan almost instantly and online. You may even qualify for an unsecured business credit line based on your personal credit and not your experience. Additionally, there are smaller private lenders and brokers that can work with you if you’d like more personalized service.
Seller Financing
Seller financing is a loan provided by the seller of the business to the purchaser. Usually, the purchaser will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman’s terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. To a seller, this is an investment in which the return is guaranteed only by the buyer’s credit-worthiness or ability and motivation to pay the loan. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank. There are no universal requirements mandated for seller financing. In order to protect both the buyer’s and seller’s interests, a legally binding purchase agreement should be drawn up with the assistance of an attorney and then signed by both parties.
