In this article, you will learn how to buy a business with no cash.

Can you actually purchase a business without cash?

According to most business experts, the answer is no. Conventional wisdom says that in order to buy a business, you need to have cash on hand. 

But you don’t have to go the “conventional” or “traditional” route. There are some situations in which you may be able to purchase a business without any cash.

It’s true. Read on. 

For example, if you have a lot of equity in your home, you may be able to take out a home equity loan to finance the purchase of a business. Alternatively, you could get a personal loan from a friend or family member. If you have good credit, you may also be able to get a small business loan from a bank.

Of course, taking on debt is not without its risks. If you're not careful, you could end up overextending yourself financially and putting your new business at risk.

Another way is through owner-financing. This is where the owner of the business agrees to finance the purchase for you. This can be a great option if you have good credit and can prove to the owner that you will be a good steward of their business. A seller financing arrangement can be set up in a dozen different ways. 

You might also form a partnership where someone else contributes the funding and you contribute your time and expertise. We call this “friends with financial benefits.”

And then are SBA loans that make it far simpler than you may imagine to make significant investments (like purchasing a small business) without having to put down a sizable down payment or exhaust all of your available cash.

Generally speaking, getting an SBA loan (either an SBA 504 or an SBA 7a) requires the new owner (i.e., borrower) to bring some equity into the transaction. The SBA wants to know that you’re serious about this business and they want you to put some “skin in the game.”

FACT: Only 40 percent of small businesses are profitable. Put another way, 60 percent are breaking even or in the red.

This presents an opportunity for the budding entrepreneur. The huge unknown is that many of these businesses are just on the verge of becoming profitable, but they require an expert's assistance to come into profitability.

Before you start a new business, you should probably think about taking over an existing business that may be on the verge of profitability.

It may be on the brink. The current owner may be spent out. Or he may just want to recoup his investment. You could find many great businesses by just looking at things from this perspective.

While most business “experts” will tell you to research the business opportunity, build a business plan, evaluate the books, etc., it’s always best to find the funding first.

You have the upper hand in any negotiation if you have the funding already available. It’s one thing you can take off the table. You can make much more solid deals if you know how much you can pay upfront.

What is the SBA?

Created in 1953, the U.S. Small Business Administration (SBA) continues to help small business owners and entrepreneurs pursue the American dream. SBA is the only cabinet-level federal agency fully dedicated to small business and provides counseling, capital, and contracting expertise as the nation’s only go-to resource and voice for small businesses.

Source: SBA.gov

What are SBA loans?

The U.S. Small Business Administration helps small businesses get funding by setting guidelines for loans and reducing lender risk. These SBA-backed loans make it easier for small businesses to get the funding they need.

The Small Business Administration (SBA) also assists small firms with contracting and consulting.

The SBA's primary role is to assist small businesses in obtaining the operating capital they require—pretty straightforward stuff.

Participating lenders provide government-insured loans to small businesses through the SBA loan program.

However, there is one point where a lot of people are misinformed: an SBA loan is not cash given to small businesses by the SBA office. The SBA instead establishes lending standards for loans made by other partners (i.e., banks and other lending institutions like credit unions)

By ensuring that a portion of the loan will be returned, the SBA aims to reduce some of the most frequent risks for lenders. A significant portion of the loan amount is supported by the government program, increasing the likelihood that enterprises will be approved for funding.

Even though the amount of money that small businesses can borrow is controlled, SBA loans frequently have lower interest rates than loans from banks do. 

SBA loans are similar to the traditional business loans provided by banks

Entrepreneurs will submit an application, get accepted, and obtain funding. After that, they repay the money with interest over time.

Can I Purchase a Business Using an SBA Loan?

Some people decide to purchase an established firm using an SBA loan. The SBA loan best-suited to purchasing an existing business is the SBA 7a loan. It can also be used for the following:

• Long- and short-term working capital 
• Revolving funds based on the value of existing inventory and receivables 
• The purchase of equipment, machinery, furniture, fixtures, supplies, or materials 
• The purchase of real estate, including land and buildings 
• The construction a new building or renovation an existing building 
• Refinancing existing business debt, under certain conditions

However, you can use an SBA 504 loan to buy or build:

• Existing buildings or land 
• New facilities 
• Long-term machinery and equipment

Or the improvement or modernization of:

• Land, streets, utilities, parking lots and landscaping 
• Existing facilities

The SBA lender will need to know the kind of business you plan to purchase when you apply for an SBA loan. They will then decide if it is likely to continue turning a profit. They must confirm that you will repay the money in full.

This is another reason why purchasing a dull business is a fantastic option for an SBA loan.

They typically have developed profit over months or even years, and they are vital to their neighborhood. For instance, there will always be a need for a car wash as long as there are vehicles on the road.

The terms of an SBA loan to purchase a business will depend on the aforementioned characteristics, but the company must also be successful and have been in operation for at least two to five years.

When you are ready to take the plunge, contact an experienced commercial loan advisor who can answer all of your questions and guide you, step-by-step, through the entire loan application process.