Businesses can be financed from a variety of sources, all of which may be used in the same transaction. Financing sources typically include: the buyer’s own cash or funds obtained from equity in real property, securities or retirement funds; loans from banks and lending institutions; or seller financing. It is expected that the buyer will have a vested interest in the business by investing his own monies. Seller financing is usually the cheapest and quickest to obtain, and it tells the buyer that the seller has confidence in his business. There are no loan fees, but the term of the loan is often short, and sellers are usually reluctant to offer it without substantial collateral. Banks will loan money on businesses that show a strong earnings history on the tax returns. However, they require extensive documentation and the payment of upfront fees. The most common type of bank loans that FRB encounters are those guaranteed by the Small Business Administration. While many lenders participate in the SBA loan guarantee program, it can be volatile and funds are not always available. Finally, family members or investment partners are also sources of investment funds, which may be the only way a buyer can get into his own business.
