So, you’re ready to buy a business. Exciting times! But now comes a big question. How will you pay for it?
There are two common ways to finance a business acquisition:
- Owner Financing
- SBA Loans
Each option has its perks and its challenges. Don’t worry — this article will walk you through both paths. By the end, you’ll know which one fits your journey best!
What Is Owner Financing?
Owner financing is when the business seller acts like the bank. Instead of giving you the full price upfront, you pay them over time. It’s like buying a car from your neighbor, and they let you make payments every month.
Here’s how it usually works:
- The buyer and seller agree on a sale price.
- The buyer makes a down payment (usually 10-30%).
- The seller carries the remaining balance as a loan.
- The buyer pays monthly over 3–5 years, sometimes longer.
The whole process can be flexible. It depends on what you and the seller agree to.
Advantages of Owner Financing
- Flexible terms: You can negotiate rates, payment plans, and timeframes.
- Faster closing: No banks means less paperwork and delays.
- Easier approval: Sellers often care more about your character and vision than your credit score.
- Seller support: Owners want you to succeed — they often agree to help train or transition the business.
Drawbacks of Owner Financing
- Limited availability: Not all sellers want to finance. Some want their money right away.
- Higher risk for the seller: If you default, the seller gets the business back. That can make some sellers nervous.
- Smaller deals: This works best for smaller or mid-sized acquisitions.
What Are SBA Loans?
SBA stands for Small Business Administration. It’s a government agency that helps people buy or grow businesses. They don’t lend you money directly. Instead, they work with banks and guarantee part of your loan.
This makes banks more comfortable loaning money for business purchases.
How SBA Loans Work
- You apply through an SBA-approved lender (this could be your local bank).
- You typically need a down payment of 10% or more.
- The SBA guarantees up to 75% of the loan for the lender.
- Loan terms can go as long as 10 years or more.
Pros of SBA Loans
- Lower interest rates: These loans have some of the best financing terms available.
- Longer payback time: That means lower monthly payments.
- Higher dollar amounts: Good for bigger deals, sometimes over $1 million.
- Builds credibility: Banks do their homework, so closing an SBA-backed loan shows you’ve got a solid plan.
Cons of SBA Loans
- Lots of paperwork: You’ll need business plans, cash flow projections, tax returns, and more.
- Slower process: Getting approved can take several weeks or even months.
- Strict qualifications: Good credit and sometimes collateral are required.
What Do They Have in Common?
Both paths require you to put skin in the game. You’ll usually need a down payment. And you’ll need to prove that you can run the business.
Both owner financing and SBA loans may require:
- A strong business plan
- Financial projections
- A good understanding of the business
And with both methods, you may gain access to seller training or a transition period. That’s pretty important — especially if the business has loyal customers or unique systems.
How to Decide Which Path is Right for You
Still with us? Good! Now it’s time to see which option fits your goals best.
Go With Owner Financing If:
- You’ve found a willing seller who’s flexible.
- You want to close fast with less red tape.
- You’re buying a smaller or local business.
- Your credit score isn’t amazing — but your experience is.
Go With an SBA Loan If:
- You’re buying a well-established business.
- You need more capital than a seller can offer directly.
- You’re okay with a longer closing process.
- You’ve got solid credit and some collateral.
Of course, sometimes you don’t have to choose just one. Some buyers use a combo deal!
Hybrid: Best of Both Worlds?
In a hybrid structure, the buyer uses an SBA loan for most of the financing, and the seller provides a small note for the rest.
This can look like:
- Buyer puts down 10%
- SBA loan covers 70%
- Seller finances 20%
This structure can help minimize the buyer’s cash out-of-pocket. It also shows the bank that the seller has confidence in the business.
Real-Life Example
Let’s say you want to buy a coffee shop for $300,000.
With Owner Financing:
- You put down $60,000 (20%).
- You and the seller agree on monthly payments for the rest.
With an SBA Loan:
- You put down $30,000 (10%).
- A lender gives you $270,000 — backed by the SBA.
Or maybe the seller agrees to finance half of that 10% down. That gives you more breathing room.
Final Thoughts
No option is better or worse. It all depends on your situation, your credit, and your deal.
Take your time. Look at multiple businesses. And talk with lenders, advisors, and sellers. The right fit will present itself.
Whichever path you choose, buying a business is a big step. But with the right financing, you’ll be brewing success in no time!
