How to Pay for the Purchase of a Business
Provided by HG.org
When someone has decided that a business should be created, he or she then must determine several things. Of these, the most important is often the matter of funding. There are various sources of possible money to invest and startup a new business, but each method must be researched and understood before moving forward.
One of the most used for many decades is the bank or financial institution loan. This route generally requires collateral and extensive paperwork with payment conditions and stipulations on top of any rental of a building and other materials. There are primary and secondary sources of loans, and each has its own merit and disadvantages. Other routes of funding are dissimilar to the bank loan and may necessitate the need for further research.
It may be possible to find an investor, and angel investor and other sources of funding when building a business. Some are able to draw on money from family or friends, and others find debt financing companies to assist with the purchase. If a property is available to start the endeavor, it may be conceivable to strike a financing deal through the seller of the building or unit. Then, the equipment, materials and resources are all that remain. Other funding may come through the initial start of selling products or services to branch out into marketing, distribution and manufacturing through a plant or other company. Once clients and consumers have started becoming part of the association or forming a relationship, it is more likely to accrue revenue.
Debt financing and equity financing are generally the two types of funding sources possible when attempting to purchase something large such as real estate or a business. Debt financing is when money is borrowed through a third-party source such as a bank, lending agency or similar location. Interest, rate of return and payments are agreed upon through a contract and conditions contain within the item. Many of these items are similar to loans or a lien on a property. If there is collateral, the institution is more likely to provide funding than if the person has nothing but his or her own credit.
Equity financing is not accomplished through actual loans but when stock, shares or interest are provided for investments into the business. This would make those that provide the funds investors that may become shareholders in the company. There is not necessity of paying back the individual. He or she is given partial ownership of the company, and he or she may be given dividends as payment for his or her investment. With the shares, stock or interest comes the power to assist in deciding what occurs within the company by meetings and votes. The partial owners may become powerful enough to change the course of the company.
When someone has followed a path to create and start a new business, he or she may have certain assets that may be used as collateral to back a profitable venture. Generally, this collateral would be in the form of real estate or large items such as vehicles. However, land and similar items may be used to obtain a loan or other funding. Many financial institutions require as much as 50 to 70 percent of the asking amount in the form of collateral. Research has specified that this might also include machinery, inventory, a personal home or related property and large pockets of land or those with mineral deposits.
If the seller is amenable to the idea, it may be possible to finance the funding needed for commercial property or inventory from the seller directly. This means that the person selling the item or property would back a loan himself or herself and give the terms of payment and any applicable conditions to the buyer. This generally takes years for the amount to be completely paid off, and the seller may have a lower or higher interest rate based on the individual. A contract would be necessary to ensure the seller is safe from being taken advantage of, and the buyer needs this contract as well to ensure no undue conditions are in place for the loan.
The Business Lawyer in Funding
No matter which option is taken for the new business owner, a contract is typically necessary. This means a lawyer should either assist in drafting it, or he or she may be needed to analyze the document for any possible complications.
Read more on this legal issueCrowdfunding, Crowdinvesting, Kickstarter, and the JOBS Act
Legal Considerations in Using Other People’s Money to Start Your Business
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.