Loan to buy stock options

As strange as it might sound, you should be working to secure loan lines of financing before you've even finalized your short list of potential acquisitions, let alone agree upon a price.

But wait, you ask, where is the money to finance the deal going to come from? Most folks, many of whom might have turned to things like a home equity loan in options past to finance their acquisitions, figure they can't land the necessary financing options days given stock collapse of the housing market and the tightening of the credit market.

Some of these naysayers are correct, says Mike West, managing partner of NorthShore Capital Advisors, a business advisory firm based in Knoxville, Tennessee. The biggest strike against potential borrowers loan if their skills don't translate well towards running the business they want to buy. The pages that follow detail what you need to know about sources of financing, getting pre-qualified, what you need in terms of collateral and negotiating the price of the business you want to buy.

To go into debt means to borrow money from an outside source -- most often a bank -- with an agreement to repay the loan principle and usually a certain agreed-upon rate of return, or interest.

You can also arrange for private debt financing from friends or family, in the form of loans. Many banks have been reluctant to provide long-term loans stock small businesses, and that's why the Small Business Administration offers guarantees to encourage banks to make longer terms loans by lowering their risk. Instead of taking out loan, you can in essence agree to sell stock or shares of your business to outside investors, sometimes venture capitalists.

This is options than a loan in that you don't have to focus on repaying the debt, but you are giving up partial ownership and, in some cases, control. Getting pre-qualified for financing often means going to a bank or other lender and obtaining a letter of pre-qualification for a loan. In order to get pre-qualified, you often need to provide information on the business you want to purchase, your collateral, and how you'll be able stock repay the loan.

Here are some pointers to keep in mind when getting pre-qualified:. When thinking about landing financing, also consider what you will bring to the table as collateral -- something that might need to be as high as 50 to 70 percent of the selling price for any kind of debt financing, says Art Loan, senior buy president of Americas United Bank, a commercial lender in Los Angeles.

Collateral can include any of the following:. Given how important the assets of a business are, the best financing game in town these days is obtaining your financing directly from the seller, says Andy Louis-Charles, head of Landist Capital Management, an investment firm in Raleigh, North Carolina.

This basically means the seller is typically willing to wait from three to five years to be paid off. It's an option that has both its benefits and its drawbacks. On the downside, seller financing can add anywhere from 5 to 25 percent to the asking price because seller's will typically lend at higher rates than a bank would. However, not all sellers have the ability to wait for their payday. At the same time, since the seller continues buy have some skin in the game, the buyer is obtaining a degree of security that the seller continues to have an incentive in having the business perform well and grow.

Borrowing from the seller also creates more negotiating opportunities for the buyer than they would ordinarily have with say, a bank. You might be able to stretch out your payments to something like 10 years to keep your payments smaller or you could even offer the seller equity in the business, where they would begin to recoup stock selling price through the continued profitability of the business. These days, given the economy, Tom Burke, senior vice president of SBA lending at Wells Fargo, the nation's largest lender of SBA-backed loans, says he's surprised his bank isn't getting more calls from prospective buyers.

While you pursue your financing, you and the seller obviously need to come to a mutually options price if you want to move forward and purchase a business. If you've become stuck, your accountant can lend you a hand by helping you understand how much you can actually afford to pay for the business after you account for your debt service and working capital requirements.

Here are several factors to keep in mind:. You're about to be redirected We notice you're visiting us from a region where we have a local version of Options. READ THIS ARTICLE ON. Enter your email buy reset your password. Or sign up using:. Sign in if you're already registered.

Straight to Your Inbox SIGN UP FOR TODAY'S 5 MUST READS Sign Me Up. Price and Finance a Business Purchase. This guide details what you need to know about sources of financing, getting pre-qualified, negotiating the price of the business you want to buy, and more. Darren Dahl is a contributing editor at Inc.

He also works as a collaborative buy and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina. Sources options Financing Types of Funding When buying a business, there are primarily two different sources of financing you can pursue. Getting Pre-qualified stock a Loan Getting pre-qualified for financing often means going to a bank or other lender and buy a letter of pre-qualification for a loan. Here stock some pointers to keep in mind when getting pre-qualified: Get approved by stock many sources as you possibly can in case, by the time you close on the sale, a bank's lending requirements have changed.

When thinking about financing the purchase of buy new business, you may need to borrow more than the actual selling price of the business. If today's economic conditions threaten the continued profitability of the business, you'll need to have a contingency plan in case the cash flow drops to a point where it can just barely cover your debt payments.

A good rule of thumb is to aim for adding an additional 90 days of working capital current assets -- current liabilities. Bringing Collateral to the Table When thinking about landing financing, also consider what you will bring to the table as collateral -- something that might need to be as high as 50 to 70 percent of the selling price for any kind of debt financing, says Art Concha, senior vice president of Americas United Bank, a commercial lender in Los Angeles.

Collateral can include any of the following: Anything from the accounts receivable of the business to its machinery and inventory. Equity in your personal home if you're lucky enough to have any or a second or third mortgage on your home. With today's real estate market, though, these options have become less attractive to many lenders who generally prefer to deal with assets they could stock convert into cash. If you are forced to come up with a personal guarantee to secure a loan, your goal should be to make it half the amount of collateral needed.

Seller Financing Is a Possibility Given how important the assets of a business are, the best financing game in town these days is obtaining your financing directly from the loan, says Andy Louis-Charles, head of Landist Capital Management, an investment firm in Raleigh, North Carolina. Other Sources of Financing Depending on the kind of money you need to borrow, you can attempt borrowing from friends and family members or even angel investors. You might even consider your options in rolling over your personal K plan to finance your purchase without taking a tax hit, says Itamar Chalif, founder of Atlantic Capital Solutions in Middleboro, Massachusetts.

Once you loan purchased the business, you might also be able to tap other sources of capital like factoring companies, which will lend you money against your AR, or even leasing companies which might be willing to buy any equipment you own and lease it back to you, which would generate an infusion of cash for the business.

Once you have a track record, banks might also be willing to extend you a line of credit. Spotlight on SBA Financing These days, given the economy, Tom Burke, senior vice president of SBA lending at Wells Fargo, the nation's largest lender of SBA-backed loans, says he's surprised his bank isn't getting more calls from prospective buyers.

Have a business plan. Loan that includes at buy three years of projections. Burke says that it's imperative that you have a plan that outlines why you are planning on buying a business and how you plan to grow it.

Clean up your personal credit. Burke suggests that every potential borrower get a copy of their credit report and make sure it's correct. Be prepared to make a down payment. To land a loan from Wells Fargo, Burke says borrowers should be prepared to make a down payment of 15 percent to 20 percent of the selling price.

He says this is an area where seller financing is playing a greater role these days. Negotiating the Price While you pursue your financing, you and the seller obviously need to come to a mutually agreeable price if you want to move forward and purchase a business. Here are several factors to keep in mind: It's useful to consider who you are negotiating with.

Most sellers are of the mindset that, no matter what kind of business they put up foe sale, they will think it's worth more than it actually is, particularly if there is loan emotional attachment to this business.

If the seller founded the business or it has been a part of his or her family, you as the buyer might find it more difficult to agree on a price.

Sellers might also have their own debt to account for, which options have a significant impact on driving up the asking price, says Chad Simmons, author of the Business Valuation Bluebook. Protect yourself from the potential pitfalls from a down economy. One way to accomplish that is to tie part of the purchase price to future earnings. These are called performance-based deals or earn outs. Not only does this build some insurance buy you as the buyer in buy short-term sales take a dip, it also puts the seller in the spot in terms of putting their money where their mouth is.

If the business is as great as they say it is, the seller should be willing to bend on this part of the offer, especially if you are at an impasse in the negotiation. Be aware of potential complications in negotiations. Sometimes, the back-and-forth of negotiating a price can get complicated for unexpected reasons.

For example, back in MarchBrian Douglas was close to finalizing a deal to buy a customer cabinet manufacturer based in Los Angeles. The rub was that the company's founder, a master Argentinean craftsman, had recently passed away. That meant that Douglas was negotiating with the founder's widow, who had an emotional attachment to the business her husband had built from scratch.

After several months, and five plane trips for Loan, the deal fell apart because he wasn't willing to pay the asking price and options seller didn't want any kind of a performance-based earn out. Build in conditions to break an impasse. Options best advice as breaking an impasse, says Peter Berg, of Transworld Business Brokers in Florida, is to make an offer through a letter of intent LOI that is contingent on the seller proving that what they say about the business is true.

In other words, build in conditions to your offer that would allow you, as you uncover aspects that make you uncomfortable, to reduce the price or bail out of the deal altogether. If the business stands up to the scrutiny you'll give it during the due diligence phase that comes next, the price will stand.

One thing to remember, however, is that under no circumstances should you ever pay the seller any cash prior stock the final close. As a show of good faith, you can put a deposit of 10 percent of the selling price into an escrow account instead. The opinions expressed here by Inc.

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