Financing a Down Payment when Buying a Business
Don’t let a down payment deter you from buying the business of your dreams.
If you’ve been exploring the idea of purchasing a business, the question of “how am I going to pay for this?” has probably crossed your mind. While every business sale is unique, the majority of our deals are funded through SBA financing, which often comes with 10 year terms and a 20-25% down payment from the buyer. The idea of obtaining an SBA loan to be paid back over 10 years after assuming ownership of a successful business is definitely fathomable; but how are you supposed to come up with the money for the down payment?
Unless you have a few hundred thousand dollars lying around that you don’t really mind parting with, you will need assistance in securing a down payment. While there are a few alternatives, the preferred method is to pull money from the buyer’s retirement fund to be used as a down payment for the business. Our buyers typically prefer this method because it is completely tax-free by the SBA and IRS and they are not penalized for pulling from their retirement in this instance. After 500 business transactions, we have become very familiar with the process of using a 401K to finance buying a business and have partnered with Benetrends to help our buyers through the process. To help give you an idea of how the process works, we have included this step-by-step guide.
Step 1: Establish a C-Corporation. Benetrends will create a C-Corporation which will be used to flow money from your 401K into the corporation to be used as a down payment. Once approved, Benetrends will file for your Employer Tax and Retirement Plan IDs with the IRS.
Step 2: Create a Retirement Plan. Benetrends will set up new corporate and retirement bank accounts to which your 401K money will be transferred. Ultimately, they will also assist you in creating a custom retirement plan.
Step 3: Rolling over your Retirement. Begin the process of rolling over the funds of your existing retirement account into your newly created C-Corporation’s retirement account.
Step 4: Fund your Down Payment. You are now able to use your retirement as a down payment by buying stock in the company directly from your newly-formed retirement account.
There are several benefits in using your retirement to fund the purchase of a business. Most buyers have benefited from using Benetrends to finance a down payment in the following ways:
- The entire transaction is tax and penalty free
- The process takes around 2 weeks from start to finish
- No effect on your credit score nor does your credit score determine eligibility
- No debt will be accrued, nor will you have loan payments
- You can pay yourself a salary from the very beginning
- Immediate cash flow and equity
Other than paying in cash, this is the easiest and most commonly used way to obtain money for a down payment is to pull from a retirement fund. We have helped hundreds of buyers secure cash for a down payment using this method and we can help you too. Buying a business can be a long process – don’t let financing stand in the way of your dream of owning a small business. To learn more about available financing for purchasing a small business, check out our SBA Financing Checklist or our Financing Information page.