The Role Of Private Lenders In The Business Sale Process
A buyer getting a loan from a private lender can seem downright sketchy to some sellers. Private loans might bring to mind loan sharks and mafiosos, the type of people who will make you “an offer you can’t refuse”.
Luckily, we’re not living in a film noir, and a reputable private lender can create a bridge between the loans available through financial institutions and the price you want for your business.
In this article, we’re going to look at the people who offer private loans and where they fit into the world of business sales.
Who Offers Private Loans?
Private equity firms, business brokers, angel investors, entrepreneurs, and other entities may all offer private loans. Here, we’re going to focus on three of the most popular sources of private financing for business sales:
The Seller
The most common private lender is the seller.
Known as vendor financing (or vendor take-back), you can offer to allow the buyer to pay back a portion of the sales price of the business over time, with interest. In fact, most business sales involve a bit of vendor financing, usually in the range of 10%-25%. Vendor financing can help you sell your business more quickly and shows buyers and lenders that you have confidence in the success of your business.
Their Family
Friends and family can be an excellent source of financing, as they generally offer more flexible terms and lower interest rates. In best-case scenarios, the family member (or members) offering the loan will have some experience running or managing a business like the one you’re selling.
Peer-to-Peer Loans
Peer-to-peer (P2P) loans have picked up a lot of steam recently—these apps allow buyers to acquire loans from ordinary people who are using the lending service as an investment vehicle. Lending Loop and goPeer are two of the most popular platforms in Canada. While most buyers won’t use P2P for the majority of their loans, they’re a great way to bridge financing if conventional lenders fall short by a small enough sum.
Why Should a Buyer Get a Private Loan?
As a seller, it’s important to understand the reasons buyers look for private business loans. Sometimes, a buyer acquiring a private business loan is nothing to worry about; other times, you may want to look at a buyer with a bit more scrutiny when they acquire a private business loan.
A Private Business Loan To Bridge Financing
This is what we’ve talked about most so far—buyers who have secured most of their financing through financial institutions but who need a bit more in order to meet your asking price. Vendor financing is usually enough of a bridge.
I have my finger on the industry’s pulse—I know how much private institutions are willing to lend toward a particular business. I keep that and your willingness to offer financing in mind when setting the price for the business.
Better Financing Terms
When buyers are offered better terms, usually through their family members, they’re very likely to take those loans. This might mean they take less financing from traditional institutions, but it’s nothing to worry about—taking better terms is just good business sense.
Low Credit Ratings
Some buyers don’t have the credit or the collateral needed to take out a loan from a financial institution; these buyers may resort to a private loan.
I vet all of my buyers before giving them any information on your business, so unscrupulous buyers won’t be a concern when you use my services. Nonetheless, if a buyer can’t obtain any financing through traditional institutions, it’s something of a red flag.
Conclusion
Private lending plays an important role in financing business sales. I can help sellers understand why buyers are using the sources of financing they are; I can also ensure that you’re only put in contact with reputable buyers. Looking for a Vancouver business broker? Give me a call today!