Is it Possible to Buy a Business Without Collateral?

When it comes to getting a loan, you can be certain that a bank will want collateral. This is true for both personal and business loans. Simply stated, if you have collateral, your bank won’t be concerned about being left empty handed if you can’t repay the loan. Many budding business owners are, in fact, held back by the fact that they lack the collateral needed to buy a business. However, the good news is that there are ways that one can buy a business with no collateral or very little collateral.

The Small Business Administration (SBA) is the first stop for those wanting to start a business with a low level of collateral. The SBA’s 7 (a) program provides banks with incentives to make loans to buyers. It is through this program that the SBA will provide guarantees for a whopping 75% of the loan amount. The borrower still has to have the remaining 25% of the loan amount. This means that on a $1 million dollar business, the borrower just has to come up with $250,000 and not the full $1 million dollars.

Through the SBA’s 7 (a) program it is possible for prospective business owners to consider businesses that would otherwise be completely out of their reach. Yet, there is a second excellent aspect to the program, namely that the cash that buyers use to meet the 25% requirement can come from an investor or a gift. Anyone looking to become a first time business owner will want to fully explore all that the SBA’s 7 (a) program has to offer.

A second route for those looking to buy their first business is seller financing. Seller financing is not rare, as many may suspect. This method of financing is actually quite common. If sellers are motivated, they are much more willing to consider seller financing. Keep in mind that there are many reasons why a seller may be motivated, such as retirement, unexpected personal problems, or just burnout. Seller financing and the SBA’s 7 (a) program could, in some situations, be used together. This combination could serve to greatly increase your chances of buying a business.

This is not to state that there are zero obstacles or limitations with the SBA’s 7 (a) program. For example, the program requires that sellers cannot receive any form of payment for a full two-year time period. There are ways to address this problem, but it is something that buyers and sellers alike should be ready to address.

A lack of collateral doesn’t have to mean the end of the dream of owning a business. If you are interested in owning your own business and lack collateral, meet with a consultant at S.C.O.R.E. and other experienced professionals, such as a business broker or M&A advisor. An experienced brokerage professional will have a wide-array of ideas for how to buy a business with little or limited collateral.