Buying a business can be a great way to generate solid returns on your investment or even begin a new career path as an entrepreneur.
But it can be expensive. A quality business that is generating solid income will not come cheap.
Of course, financing may be available for many businesses, but you are likely still on the hook to come up with a sizable down payment (you are talking anywhere between 10% to 30% or more). But there are ways to come up with this type of down payment, even if you don’t have any money.
We will cover 9 strategies you can use to come up with a down payment on a business if you don’t have money on hand. I will also provide at the end of the article four businesses that have very low start-up costs that you can explore (with links to my articles showing you how to start them).
With that, let’s dive into it.
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The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
First Things First: Get Primary Financing
The first thing you will need to do is get good old regular financing for the purchase of your business. There are a lot of options out there, including SBA loans, conventional bank loans, online lenders, etc.
Each of these loan types will have different requirements and terms. SBA 7(a) loans, in general, require a minimum of 10% down, but many lenders offering SBA loans require more than that.
In addition to the down payment, you may need to meet other criteria, including credit, income, and asset requirements. The target business will also be evaluated to make sure it is profitable enough to support the loan payments.
The same holds true for traditional bank loans. In fact, they may have even stricter down payment requirements (20% or more) and more stringent qualifying criteria.
If you prefer to operate online, you may want to check out Fundera. They are affiliated with Nerdwallet and offer small business financing options from a variety of potential lenders. You fill out one application and they provide you with a list of lenders suited for your situation.
Bottom Line: There are a lot of potential options, but the trick is to find a source of funding that covers most of the purchase price of the business. Once you have secured a viable source of primary financing, then you need to work on finding a way to come up with the remaining down payment.
The following nine strategies are all about trying to do that.
9 Strategies to Buy a Business With No Money
1. Seller Financing
In some cases, the seller may be willing to help finance the purchase of the business.
In very rare instances, the seller may finance 100% of the purchase price. In that case, you don’t even have to deal with SBA or bank financing (assuming the terms of the seller financing are acceptable). But most sellers want to make a clean break with the business when they sell, so they will often resist seller financing.
But it doesn’t hurt to ask. In my view, having the seller have a stake in your success is never a bad thing.
Even if you can’t get 100% seller financing, you may be able to convince the seller to finance the down payment portion. Assuming they agree, you have now financed 100% of the cost of the business.
But it’s not necessarily that easy. The bank providing primary financing may not allow seller financing that covers the entire down payment. They may want you to have some skin in the game, in which case, you will need to use some of the other options discussed below to make up the difference.
2. Credit Card Cash Advances
If you are desperate to find funding, you can look into credit card cash advances.
I do not recommend them because of their high interest rates (although some companies may offer teaser rates that are very low for a limited period). But it can be an option to explore if you only need a small amount of money to buy the business (like a blog that costs $1,000 – yes, they exist) or if you just need to make up a modest shortfall in your down payment.
As with other borrowing options, getting additional loans can hurt your chances of qualifying for your primary loan because it can impact your debt-to-income ratio. It may even be prohibited outright by the lender who is providing the primary source of funding, so you need to check with them before pulling the trigger on this option.
3. Peer-to-Peer Lending
Another financing option is peer-to-peer lending. It’s certainly a less risky option than credit card cash advances and will likely carry a much lower interest overall.
Peer-to-peer lending connects borrowers directly with individual investors who are looking to finance loans and earn a return on their investment. This happens via online platforms offered by companies like Prosper, Lending Club, Upstart, Peerform, etc.
The interest rate you will have to pay may depend on a variety of factors, including your income, credit score, and other risk factors.
Here is a good comparison chart of various peer-to-peer lending platforms.
4. HELOC
If you own a home and have some equity in that home, you can apply for a Home Equity Line of Credit (HELOC) and pull some of that equity out in the form of cash. Because HELOCs are secured by your home, they tend to have lower interest rates than other lending options.
If you already have a HELOC in place, it operates just like a checking account. You can stroke a check without worrying about filling out an application or getting approved. It’s incredibly convenient.
That being said, you could lose your home if you default on the loan.
So consider carefully whether you want to take that risk. And if you choose to do so, pay off the loan as soon as you can. One other thing to note is that some lenders will want to use your home as collateral for the business loan. If you draw against the equity in your home, your lender may think your home is no longer sufficient collateral.
5. Margin Account
If you have a securities brokerage account, you may be able to convert that account into a “margin account,” and use that margin (which is basically a loan from the broker to you) to fund your business.
Some brokers offer really low interest rates for margin accounts right now (Interactive Brokers comes to mind), so it could be an interesting option.
But there are significant risks associated with this strategy. Namely, if the securities that are backing up the margin loan decline meaningfully, you may get a “margin call.” That is really bad and it could cause you to sell your securities at a depressed price.
6. Borrow From Your 401(k)
You can also take out a loan against balances in your 401(k) to fund the purchase of your business.
The cool aspect of this approach is that you are borrowing money from yourself, so you are paying yourself back (with interest). Not all employers allow you to do this and there are limitations on how much you can borrow (the lesser of 50% of your assets in the 401(k) or $50,000). Source: IRS.
A bit of a warning here: Don’t use this option if you think you might lose your job soon or you plan on jumping ship – you will need to pay back the entire loan balance within 60 days if you leave your job.
If you don’t repay within that 60 days, the withdrawn amount will be subject to taxes and penalties if you are under 59.5 years old.
Obviously, borrowing from your 401(k) (or your Roth IRA for that matter) may not be ideal from a retirement planning viewpoint because that money should be dedicated for retirement. But if you are aware of the risks and feel that investing in a business is a better path toward securing your retirement, this is an option you may want to explore.
Update: If you have been affected by the pandemic, the CARES Act allows loans up to $100,000 and has relaxed other requirements for 401k loans (like allowing you up to 6 years to repay the loan). Source: CNBC
Final Words on Borrowing: Ok, we covered a lot of strategies that center around borrowing money to fund the purchase of your business. There’s good reason for this. It is the easiest way to come up with a large amount of cash when you don’t have it on hand.
But excessive debt can be dangerous.
Not only can you ruin your chances of qualifying for your primary financing if you over-leverage yourself, but you can also get burned if the business does not perform as expected.
If you borrow to purchase any income-producing asset and that asset underperforms (or doesn’t perform at all), you may be in trouble. More trouble than if you had bought the asset without using debt. So carefully consider the risks and benefits of using excessive amounts of debt to aggressively finance the purchase of your business.
On that note, let’s pivot away from borrowing strategies and explore some non-debt-based solutions.
7. Sell Existing Assets
Ok, this one’s pretty obvious, but I include it for purposes of completeness. If you’ve got stuff lying around that you are willing to sell in the pursuit of your business, you can and should do that. You can start small.
I have written an article on 10 ways you can easily sell your unwanted stuff online. There are some pretty unconventional tips there that I think are worth checking out.
8. Withdraw Roth IRA Contributions
If you have money in a Roth IRA, you may not realize that the “contributions” portion of your IRA is not locked up. You can withdraw it tax-free and penalty-free at any time and for any purpose.
Now, you have to make sure you have a Roth IRA and not a traditional IRA because the rules are very different for traditional IRAs. And you have to make sure you only withdraw up to the amount of contributions you made (not any gains or earnings you made on those contributions).
Screwing up here can mean bad tax consequences for you. To be on the safe side, you should consult with your tax advisor before making the withdrawal.
9. Enter Into a Partnership
If the other options don’t work for you, try investing in the business with a partner. There are lots of people out there looking for a solid return on their investment.
If you have done your homework and have a compelling business plan, you may be able to convince someone who has some disposable funds to invest that money into your business.
These arrangements can be structured in many ways.
It can be a simple loan, which would be repaid based on terms you and the partner mutually agree on. Or it can be a profit-sharing arrangement where the partner gets a piece of the profits of the company (both ongoing cash flow and net profit when the business is sold).
Of course, I want to shoot straight here. There are countless stories of partnerships gone bad and relationships irreparably harmed, so keep that risk in mind when exploring this option.
Conclusion
So there you have it – 9 ways to buy a business with no money. Hopefully, these strategies can provide you a path toward starting your small business journey.
Want to learn how to buy a specific business with no (or low) money down? Check out my article on how to buy an ATM business with no money.
In addition to the ATM business (which you can start for around $5,000-$7,000), there are other businesses that have very low start-up costs include blogging, vending machines, and bounce house rentals. I have written articles with step-by-step instructions on how to get started on each of them. Check them out below.
How to Start a Blog From Scratch
