Looking for financing to start a small business
December 3, 2007 11:52 AM   Subscribe

My husband has been given the opportunity to purchase a small business. He knows that the company will be sucessful. We need about $10,000 to start it up. Here is the problem: he has a great credit rating, but he is currently unemployed and we do not own a home to put up as collateral. Are there any creative financing solutions out there for him?
posted by amysk to Work & Money (19 answers total)
Small Business Administration is the place to start. I don't think you should automatically think that because you don't have a house, you don't have credit.
posted by parmanparman at 11:57 AM on December 3, 2007

If you are trying to get a loan, I would say you are going to have a hard time. If you have no income and no collateral, nobody is going to want to lend you any money.

If he did have enough monthly income to cover the payments, you could try a site like Prosper, where you can explain what the loan is for and normal people decide to lend you part of money for the loan. Even Prosper lenders aren't usually crazy enough to give a loan to someone who doesn't already have the means to make the monthly payments, though.
posted by burnmp3s at 12:03 PM on December 3, 2007

Do not put up your home as collateral for a business. You may think you know it will be successful but what if it isn't? A great many things can happen in a terribly short period of time.

The SBA may or may not provide the money you need but they will take a good amount of time.

If this is an existing business, one source of money could well be the vendors for that company. They have a vested interesting in the continuing successful operation for that business.
posted by trinity8-director at 12:03 PM on December 3, 2007

Are you purchasing an existing business? It's unclear from your post. If so, will the current owner offer financing? If it were me, I'd accept, say, $500 a month for 2 years.

It also depends a bit on where the money is going. If it's all capital assets (e.g., he's buying an oven for a bakery), you should look into whether the payments can be deferred. There are plenty of situations where this wouldn't work, which is why I ask about the business.
posted by fogster at 12:17 PM on December 3, 2007

amysk, it's a bit unclear from your question exactly what you want to do, and why you need $10,000 to do it.

If you're purchasing an existing business, the usual method is to do asset based financing, leveraging the value of the business assets for the cash to buy it, much like a mortgage is an obligation on your credit, secured by the value of the property on which it is created. If the business (or its demonstrated cash flow) is worth $10,000, you'll have no problem financing it. Talk to your bank. If you can't easily commercially finance purchase of a going business, that's a warning sign that the risk represented by such a purchase exceeds its foreseeable value - you might need to reconsider, or at least restructure the purchase. In some cases, a buyer of a business can actually walk away from the closing with net cash in his pocket.

However, if you are starting a business from scratch, and thus have no provable positive cash flow, you may need capital, as such ventures are rarely eligible for commercial loan financing. But you may find that vendors are willing to cut you favorable terms during your start up phase, and some customers are willing to pre-pay for good and services. Such concessions create cash for operations, and are worth exploring.

If you're trying to raise a franchise fee (a franchise operation being the source of your husband's confidence about the business), your options may be further constricted, because franchise sellers are trying to assure that those getting franchises have the capital to operate them, and also, because many want money to cover training and franchise legal and licensing costs. However, not every franchiser is McDonald's, or Jiffy Lube. Some franchise operations will work with you to structure the franchise fee as a deferred payment, once your operation is turning positive numbers.

If you're business is one that requires a physical store front, offices, or will employ people, and you are willing to locate it in disadvantaged areas, and train and employ people who are disadvantaged, you may qualify for substantial tax relief, and even government economic development assistance (loan guarantees and matching funds, interest rate buy downs, etc.), for participating in economic revitalization of blighted areas.

Essentially, the phrase "creative financing" is simply a shortcut to finding, if any exist (and they may not), a commonality of interests among as many parties and stakeholders to a transaction, in which the resultant flows of benefits in the future will be acceptable to all, for the risk they are undertaking today. Reduce their risks, increase their benefits, shorten the time until they receive benefit, or solve an existing problem, and you can get the economic support you need to accomplish what you want to do.
posted by paulsc at 12:22 PM on December 3, 2007 [3 favorites]

At least have a conversation with a business banker at your bank and fill out an application for a SBA-backed loan. 10K isn't that much money.
posted by mrbugsentry at 12:23 PM on December 3, 2007

Response by poster: Sorry if I wasn't clear enough. The business is making rubber fishing lures. The person currently making the lures is selling my husband all of his equipment, his vendor and customer lists, the logos, website and name. He is selling the business because he has too much demand for product and not enough time to devote to it, since it is a part-time second business for him. Because of the demand, we know that it will be profitable. Unfortunately the business records are a little informal and we don't have much to show a bank.
I looked at Prosper, and unfortunately we live in a state where Prosper loans are unavailable.
posted by amysk at 12:50 PM on December 3, 2007

How did the number $10k come about?
posted by jeffamaphone at 1:00 PM on December 3, 2007

Following up jeffamaphone, if the seller is too busy to keep running the business (a part-time second business for him) then he apparently doesn't need any $10,000 up front. The seller can finance the purchase of the business. Your husband can pay him monthly over 2 or 3 years.
posted by JimN2TAW at 1:07 PM on December 3, 2007

because he has too much demand for product and not enough time to devote to it

This is generally a warning sign, unless the seller is well employed elsewhere or has some greater means. That said, the SBA is more likely to give you a loan if you live in economic development areas, are a minority, or other people will lose their jobs if the loan is not made.
I would talk to your local banker in person. This is exactly what they do.
posted by kuujjuarapik at 1:09 PM on December 3, 2007

This makes me so nervous. The paperwork is informal, the guy claims he makes money on the business, so much so that he doesn't want to make money on it any more?

How many lures will y'all have to ship to realize that $10,000 that you don't have?

Please don't buy this business.

How about the guy who owns it hires your husband to run it for 90 days at minimum wage, with the option to buy at the end of the 3 months?
posted by dirtdirt at 1:13 PM on December 3, 2007 [1 favorite]

How about the seller shows you his tax returns?
posted by JimN2TAW at 1:27 PM on December 3, 2007 [1 favorite]

If you want to pursue this, I'd look for the seller taking back a a balloon note at 24 months, if not for the whole price of the business, at least for 50%. At only 50%, you're then looking for $5,000. You might get $2,500 by selling or borrowing against personal property, life insurance policies, IRA or 401K plans.

And then, you'd only be looking for $2,500. With 75% of your financing in place, getting the last $2,500 is a straight signature loan for a person with good credit, even if employed at minimum wage job. So, your husband might have to take a temporary job to get a signature loan.

What's really important is that you get some indemnification of existing problems in your purchase and sale agreement, so that if the current owner, who has been "casual" about his books, is found to owe additional unpaid taxes or fees, that he is responsible for paying them promptly. You don't want to assume vendor bills for inventory you should already own, or lose customer receivables due to warranty claims or delivery issues that are overhanging. Make sure you have a lawyer draw up your purchase and sale agreement, and make sure you're registered and have your tax ID and accounting ready to go.

SCORE is a great resource for practical, free advice, and contacts. Talk to them before proceeding.
posted by paulsc at 1:29 PM on December 3, 2007

Ask the guy for 'sweat equity'. Work for him for a while to gain equity and go from there.
posted by jasondigitized at 2:46 PM on December 3, 2007

Many business purchases are done by a smaller upfront price with a contract to pay the rest of the cost over time often as a contracted consultant fee to the original owner.

Immediately this raised red flags for me as well. You need to see some proof of income this business has generated and investigate all possible costs (materials, packaging,shipping)yourself.

Good luck - but both of you need to be very pragmatic about this. And running a business on one's own takes a certain mindset. The bulk of the work will need to be done while alone - not easy for most people.
posted by readery at 4:13 PM on December 3, 2007

If he's selling the whole business for 10k then it will not make you a lot of money. The general rule of thumb is annual revenue * 3-5 years = cost of business. This means that the expected annual revenue should be between 2-3k per year, which last time I checked is not enough to support a family on. If this *is* a really lucrative business, this guy would be putting all his work into it.

dirtdirt's idea is the best.

I don't think that buying businesses today makes the same sense it might have a while ago. Changes happen a lot more frequently, and information is a lot more fluid, so it's harder for you to have a long term advantage over potential competitors.

The only thing that the vendor is selling that is of any real worth is the equipment. Even if he is "giving" you his customers they may or may not stay with the company when he leaves. And as someone who has personally developed and designed logos and websites, I can tell you that they are essentially worthless. Which is to say, they are 100% necessary to the business, take a lot of effort and money to produce, but don't transfer well at all and are only meaningful to the extent that the business is strong.
posted by Deathalicious at 5:18 PM on December 3, 2007 [1 favorite]

You might consider www.prosper.com which will allow you to get an unsecured loan for up to 25k. It is particularly a good solution for people with excellent credit.
posted by Lame_username at 7:18 PM on December 3, 2007

To answer your question directly, it is going to be difficult. I'd try a vendor finance option with the existing owner and see if he is willing to have you pay him a regular amount over time.

In order to have him accept you offer and for you to do the 'right thing' I'd offer to pay a smallish non-refundable deposit, and a schedule regular repayments. The total amount that you pay should be more than he'd get if he invested in money in the bank or term deposit, but less than what you'd pay for a loan. Figure the term out so that you can make the payments

I also try for an option to sell the business back to him if certain targets aren't met in a specific timeframe. Make the targets simple, measurable and realistic so they can't mis-interpreted. You'll unlikely to get this in the contract, but if you do, you have a great safety net.

I see much larger businesses than this selling with little or no documentation all the time. It can be a very good negotiating tool, but you need to be happy to take risks. If you are willing to take a risk, then the reward could be worthwhile.

The downside is that the business isn't successful or you have a change in plan and you are stuck paying out a loan for nothing.
posted by dantodd at 10:30 PM on December 3, 2007

Yes, I was getting at what Deathalicious said. When I asked where the number came from, I'm used to business valuation in Seattle where it's usually Cost = AnnualRevenue * 10. A fast food franchise that makes 80k a year can expect to sell for 800k.

I too will express a desire that you should proceed with extreme caution, ask for a little more proof, and evaluate how well you really know this guy.
posted by jeffamaphone at 9:28 AM on December 4, 2007 [1 favorite]

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