Non SBA Deal Financing

Summary

In this video, David C Barnett discusses financing small business deals without the Small Business Administration (SBA) loans available in the US. He explores alternative financing options for Canadians, such as the Canada Small Business Financing Act and the British Business Bank's program. Barnett also outlines a general formula for structuring deals with or without bank involvement, emphasizing the importance of a solid equity position and manageable debt for sustainable business growth.

Takeaways

• 🌎 The discussion is focused on financing business deals without relying on the Small Business Administration (SBA) loans available only in the US.
• 🇨🇦 Canadian businesses can utilize the Canada Small Business Finance Act Loan program for financing, which is backed by the government and has a cap of $500,000 for most businesses, with special conditions for real estate involvement.
• 🏛 The British Business Bank offers a similar program to the Canadian one, providing guarantees on loans up to £2 million, supporting various types of financing including term loans and asset-based lending.
• 💼 David C Barnett emphasizes that business financing typically involves four key components: capital or fixed assets, operating capital, goodwill, and a combination of leases, mortgages, and loans.
• 🏦 Traditional bank financing often requires a 3:1 debt-to-equity ratio, meaning the business owner should have at least 25% equity in the business.
• 💵 Seller financing is crucial, especially for the intangible assets like goodwill, where the seller's agreement to finance a part of the deal is essential.
• 🏠 Personal guarantees and collateral are often required by banks to secure loans, which can be a deterrent for some business owners with substantial personal assets.
• 🚫 The script warns against over-reliance on alternative financing due to higher costs and shorter amortization periods, which can lead to cash flow issues.
• 📈 Barnett suggests that conventional financing can bring discipline to deal-making by requiring more equity investment, leading to better cash flow management.
• 📘 The video promotes Barnett's book 'Buying vs. Starting a Small Business' and his online training courses as resources for learning more about business acquisition and management.

Q & A

What is the main topic of the video?

The main topic of the video is financing business deals without the use of Small Business Administration (SBA) loans, specifically discussing alternatives available to Canadians and non-Americans.

Who is the host of the podcast, YouTube channel, and blog mentioned in the script?

The host is David C Barnett.

What is the name of the special playlist created by David C Barnett for his business videos?

The name of the special playlist is 'Get Into Business 101'.

What is the Canadian equivalent of the SBA loan program?

The Canadian equivalent of the SBA loan program is the Canada Small Business Finance Act Loan program, administered by Industry Canada.

What is the maximum loan guarantee provided by the Canada Small Business Finance Act Loan program?

The maximum loan guarantee provided by the Canada Small Business Finance Act Loan program is CAD 1 million, but the full amount is only available if real estate is involved in the business deal.

What is the role of the Business Development Bank of Canada (BDC) in financing business deals?

The BDC is a government-owned bank that provides financing, often focusing on cash flow lending. It may work together with other banks to finance business deals.

What is the typical debt-to-equity ratio preferred by banks when financing business deals?

Banks typically prefer a debt-to-equity ratio of 3:1, meaning they like to see the business owners have at least a 25% equity stake.

What does the term 'Goodwill' refer to in the context of business deals?

In the context of business deals, 'Goodwill' refers to the intangible value of a business that is greater than the value of its tangible assets.

What are the four components of financing a business deal as outlined in the script?

The four components of financing a business deal are leases and loans against capital or fixed assets, revolving credit related to operating capital, the business owner's cash contribution, and seller financing.

What is the significance of the 3:1 debt-to-equity ratio in business financing?

The 3:1 debt-to-equity ratio signifies that for every dollar of debt, there should be at least 25 cents of equity. This ratio provides a buffer for the lender and indicates the level of risk the business owner is willing to take on.

What is the potential downside of alternative financing methods mentioned in the script?

The potential downside of alternative financing methods is that they often come with higher costs, shorter amortization periods, and can lead to tight cash flow positions, which may result in the business failing to meet its financial obligations.