Navigating financing in a high-interest-rate environment can be challenging, but we at Transworld have been there before, and there are plenty of financing options available.
There are several implications on buying a business when there are high interest rates:
- It can be more expensive to take out a loan, as the interest payments will be higher.
- It can be more difficult to qualify for a loan, as lenders are more likely to be stricter with their criteria.
- The terms of the loan may be shorter, which could make it more difficult to pay back the loan.
- The value of the business may come down due to the need to carry more of the financing burden by buyers going forward.
The most popular types of financing used to buy a business are SBA loans and seller financing. The good news is that there are still currently plenty of banks willing to loan money. The bad news is that interest rates for fixed-rate loans are running in the 10% range.
Seller financing is still the most utilized option when buyers purchase businesses, and since the interest rate is negotiated privately, there could be better rates obtained by buyers.
A less commonly used alternative is the ROBS (rollover for business startups) program where buyers invest their retirement plan funds into acquiring a business. The investment in the new company’s stock does not have to be paid back therefore bypassing the requirement to pay interest.
Other loan alternatives can include credit cards, merchant service advances and private debt sources, which all usually have very high interest rates (unless borrowed from friends or family).Here are a few strategies to consider:
• Compare Dierent Financing Options: It is important to determine which option best meets the needs of your business purchase; you may be able to use a combination.
• Consider Using a Variable Interest Rate Loan: These loans often have a fixed rate for a short time then become variable. The hope is that the interest rate will go down over time, which you can then refinance later. Just watch out for prepayment restrictions and penalties.
• Negotiate Terms: It is sometimes possible to negotiate the interest rate and repayment schedule. This may be difficult when dealing with banks as they may have rules/underwriting policies to follow.
Sellers can negotiate whatever terms they deem appropriate, which is the best way to combat high interest rates.
• Consider Alternative Financing Options: Alternatives such as the ROBS program and friend/family investors could help avoid high-interest loans. Also, there may be an opportunity to sell owner-financing notes post-closing so the seller gets his or her cash, and you get the financing you can afford. There are a variety of resources available to consider:
• Small Business Administration: The SBA provides online resources at sba.gov.
• Banks That Specialize in SBA Lending: Live Oak Bank, Newtek, and The Huntington National Bank are the top three lenders in the marketplace, and they have great associates that can help you understand the choices available.
• Loan Brokers: There are many talented loan brokers that can help you choose options for financing. The nice thing about using a broker is their ability to shop the loan and find you the best deals. Multi-funding, Business Capital, Main Street Funding and Diamond are a few.
• Business Brokers: Intermediaries can help business buyers find a multitude of options and help them make an informed choice. They often know who is hungry for new loans.
Navigating financing in a high-interest rate environment can be challenging, but it is possible to find options. It is also important to consider the risks associated with the different methods of financing and even with high interest rates, business buyers can still meet their needs and get a great deal.