How to Finance a Business Purchase

Financing Facts

There still aren’t too many ways to finance the purchase of a business. Here are the primary methods:

Buyer Financing:
Some buyers may have the cash available to purchase the business. Some may elect to use equity in their residence or other real estate. Others may have other assets that they can sell or borrow against.

Bank Financing:
Banks may lend against a buyer’s assets as described above. They may also lend against the assets of the business, assuming there is sufficient value to support the loan. The business will also have to make sense to the bank, regardless of the asset value. In fairness to the banking system, many of the figures supplied by business owners have very little relationship to the actual earning power of the business.

Venture Capital Firms:
These firms do not, as a practice, lend to small or even many mid-size businesses unless tremendous growth is anticipated. They also usually expect an equity position in the company.

SBA Loans:
What is the SBA? The SBA is the United States Small Business Administration that has been in existence since the 1950’s. The 7a SBA program allows customers to obtain financing for a variety of reasons which includes business acquisition financing. This financing allows banks to offer more favorable terms than are normally available. In fact, some banks offer terms of up to 10 years with no balloon payment and no prepayment penalties on these business acquisitions. In addition, business acquisitions that include the commercial real estate can be financed for longer fully amortizing terms.

SBA have become more popular. There is now some competition among lenders for these loans. Many banks offer them, but the preferred SBA lenders seem to have the upper-hand in both acceptance and service.

Other Sources:
This category includes family, friends. credit cards, and leasing companies. Some suppliers have been known to assist in the financing of a small business.

Seller Financing:
This is, by far, the largest source of financing available for the purchase of a business. Many industry experts say about 90 percent of small businesses sell with, or perhaps, because of, the seller financing a good portion of the sale price. Buyers have much more confidence in the decision to purchase a business when the seller is willing to assist in the financing. The buyer has confidence that the seller believes that the business will service the debt, in addition to providing a living wage.

(This information was taken from the Today’s Business Scene newsletter copyright 2001 Business Brokerage Press)

The Necessary Paperwork You Need to Hand in an SBA Loan Application.

Copy of Purchase contract

• Copy of management resumes for each applicant owning 20% or more of business signed and dated-you can use the one in the SBA application
• Copy of personal tax returns for signed and dated for each applicant owning 20% or more of the business
• Personal financial statement, signed and dated, for each applicant owning 20% or more-you can use the one in the SBA application
• Corporate tax returns of business for seller signed and dated.
• Business plan including products and services, location, demographics, # of employees, customer base.
• Copy of green card if applicable front and back.
• Name address and phone # of banker, accountant and attorney.
• Check for $1,000 or more, refundable if loan is declined.
• Interim financial statement for seller’s business up to the last quarter of the current year.
• Aging of receivables and payables if applicable.
• Last 3 years of tax returns for any other business that the borrowers currently own.
• Copy of personal bank statements for the last two months showing cash to buy the business.
• Seller to fill out 4506 IRS tax form (requesting 3 years of originals tax returns from the IRS.
• Buyers gift letter if the down payment is coming from a relative.
• Life insurance on buyer as requested by SBA – Mass Mutual – Robyn McGloin 561-279-2551
• This information was provided by CIT Small Business Lending.

Document Checklist in Order to Close on an SBA Loan.

• Corporate Information (of borrower and any corporate guarantor, if applicable)
• Articles of Incorporation, with any amendments
• Certificate of good standing from Florida Department of state
• Corporate By-Laws

List of all corporate officers and their titles

• Copies of all issued stock certificates and next blank certificate (front & back)
• Corporate seal- (please bring to closing)
• Filed fictitious name certificate from Dept of State (if applicable)
• Federal Tax Identification
• Other Closing Requirements
• UCC-1 filed with the secretary of state (form to be provided by lender’s counsel)
• Copies of vehicle title/registration
• Attorney opinion letter from borrower’s counsel in a form acceptable to lender
  (Form to be provided by lender counsel)
• Copy of promissory note evidencing borrower’s/guarantor’s/principal’s existing obligation to borrowing entity or other third party (said obligation to be subordinated to lender’s loan)
• Lease (Fully executed covering the term of the loan)
• Collateral assignment of lease with landlord’s consent & waiver of lien rights
  (form to be provided by lender’s counsel)
• Copies of all applicable business licenses/permits required for borrower’s business. In the alternative, an application for same validated by the county/city is acceptable.
• Detailed list or invoices for all machinery, equipment, furniture, fixture and or inventory which will secure this loan. The list or invoices should include item, model# description and serial #
• Evidence of cash injection into the business by the individual principals of the borrower. This should be in the form of cancelled checks with appropriate invoices or receipts marked “paid” All such evidence must reflect that the injected funds originated from the personal accounts of the borrower

The easiest way to show proof of your cash injection into your business is to supply us with copies of the following from your individual/personal bank account:

• Copy of canceled check issued by you to your business, or
• Copy of bank statements reflecting the debit of this check.
• No credit card receipts accepted for cash injection and vendor invoices.

Another way of showing proof of cash injection can be used when paying bills or making purchases on behalf of the business. If this is the case, the injection must also be documented by providing the following: .

• Copy of your personal cancelled check issued to the vendor/franchisor/landlord.
• Copy of the invoice (franchise agreement/lease agreement) reflecting what was paid for or purchased.
• Copy of the receipt indicating invoice was paid.
• To facilitate and track your cash injection/reimbursement, you also will have to prepare a schedule itemizing each vendor/invoice/check.
• Estoppel letter from existing lender evidencing the exact amount of the loan to be paid off by borrowers at or prior to closing (if applicable)
• Collateral assignment of lease and lien subordination, if applicable.
  (form to be provided by lender’s counsel)
• Copy of finalized itemized invoice for borrower’s attorney’s fees
  (required at closing for attachment to the SBA compensation agreement)
• Certificate of occupancy or other evidence from county that subject improvements have been completed in accordance with all applicable code & county requirements.

Insurance Requirements:

Life insurance on the life/lives, each in the amount of the loan (for a total amount of ______ to be collaterally assigned to the lender. (Lender or lenders agent must be in possession of the original policy prior to closing)

Collateral assignment of Life insurance policy(s). You will have to contact your agent to obtain an assignment of benefits/proceeds form for the policy-this form must be completed and filed with home office of your insurance company in favor of the lender.

Life insurance Instructions:

A complete copy of the life insurance policy(ies) on the life/lives of the borrower(s) at least in the amount of the loan, as defined in the conditional commitment letter and SBA authorization and the loan agreement must be received by the lender, prior to closing. Decreasing term insurance is acceptable.

Borrower may use existing life insurance to meet this requirement.

Note: Life insurance policies used as collateral for this loan may not be group policy(ies) or government policy(ies). In addition, lender cannot be named as beneficiary on the policy(ies).

You will have to contact your agent or insurance company and obtain an assignment of life insurance policy as collateral form for the policy(ies) which is approved by your insurance company. Please execute the form, have your signature notarized, if required, and return to your agent who will forward the document to the home office of your insurance company.

This form must be filed/recorded with home office of your insurance company. the endorsement should list the lenders legal address.
(Personal Property) Evidence of hazard insurance coverage on all collateral in the full replacement cost/maximum insurable property located at your address. Lender is to be named as mortgagee insured in first position.
(Personal Property) Evidence of flood insurance coverage, if applicable, in the full replacement cost/maximum insurable value on real property located at buyer’s address.

Prior to closing, Lender requires evidence of hazard and liability insurance on collateral property for the full value on all pledged assets. Fire and extended coverage insurance must contain a mortgagee clause for lender similar in character to the “New York standard mortgage clause”. General liability insurance in an amount satisfactory to lender (minimum amount of $1,000,00) is also required.

Endorsement: To the lender

“Loss payee” on contents coverage, “mortgagee/loss payee” on building coverage and “additional insured” on general liability.

The binder /certificate of insurance should contain the following information

The name and the address of the insured.

The name and mailing address of the certificate holder (Lender)

Location(s) of the operation(s) of the insured

Description of property or equipment insured

Description of coverage, including:

name of insurer,

policy numbers,

policy limits,

deductibles,

expiration date of policy and,

any special conditions or extensions of coverage in affect. i.e., property certificates – loss payee, and mortgage endorsements, all risk or special form coverage liability certificates – additional insured endorsement, occurrence form coverage.

Should include written notice to the lender 30 days prior to cancellation or material change in policy wording.

All hazard insurance policies must contain the following clause “The interest of the lender and the SBA shall not be invalidated by any act or neglect of the mortgagor or owner of the insured property”

Authorized signature of the borrower’s insurance agent or carrier and date

(General Liability) Evidence of liability insurance for the borrower in the minimum amount of $1,000,000. Lender is to be named as loss payee/additional insured.

(Worker Compensation) Evidence of Worker’s Compensation insurance for the borrower as required by applicable Florida Statutes.

Please note: The following Lender’s loss payable endorsements is required on all insurance policies.

A closing cannot be scheduled until all items in this checklist have been received and deemed to be satisfactory by the lender.

Please note that this checklist is an overview of the information required by the commitment letter and does not constitute a final binding list of items which may be required by the lender prior to closing. All questions regarding the above documents/information should be addresses immediately to lender’s counsel to ensure a smooth and efficient closing

Required information for Landlord:

• Legal Name:
• Contact:
• Address:

Legal description

• Parcel ID
• Lot #
• Block #
• Section
• Please attach legal description from deed or tax assessor.