If you’re hoping to buy an online business, determining how you’ll fund the sale before you begin your search for a business owner who hopes to sell their web business is a wise idea. Experienced website brokers will tell you that obtaining bank financing to purchase an online business can be difficult. Lenders are often hesitant to extend credit for purchasing Internet companies, particularly when there is no major real estate or equipment involved in the sale that can be used as collateral.
As a result of the challenges that can come with securing financing for a web-based business, online business owners and accountants typically recommend that prospective buyers apply for SBA loans. With the guarantee of the U.S. Small Business Association, banks are often more willing to extend credit. To qualify for an SBA loan through the 7(a) loan program you must:
1. Be a small, for-profit business. In order to qualify for an SBA loan, your business must operate for profit. That doesn’t mean that it has to be immediately profitable; it simply means that it’s not a charity or other nonprofit organization. The company must also meet the SBA’s definition of small for its specific line of business. You can find detailed information about all of the size requirements at SBA.gov.
2. Do business in the U.S. To qualify for a small business loan to buy an online business, the company must be based in the U.S. or do business in the U.S. and its territories. You don’t have to be a U.S. citizen to qualify; however, preference is often given to citizens.
3. Have invested equity and have used other resources. You must be looking to purchase a reasonable amount of equity in the company that you’re purchasing. The SBA evaluates this on a case-by-case basis, but if you’ll be purchasing the business yourself or with equal partners, chances are you’ll be acquiring enough equity. The SBA also requires that you have no other financial resources available for use. If you are shown to have a substantial personal savings that could be used to buy the business, it’s likely the SBA will turn down your request.
4. Have a legitimate need. The SBA only extends loans for legitimate business purposes. Purchasing an online business is generally considered a legitimate reason to seek an SBA loan.
5. Have a record clean of certain debts or crimes. You cannot receive an SBA loan if you owe any money to the U.S. government. In addition, the company that you wish to purchase cannot owe money to the government or have ever caused the government to incur a financial loss, such as writing off lost tax revenue. In addition, you cannot currently be incarcerated or on probation or parole for a crime, and no partner that owns 20 percent of your business or more may be serving a sentence of any kind.
6. Be willing to guarantee the loan. If you will own 20 percent of the business or more, the SBA will require you to guarantee the loan personally. This means that if for any reason you do not pay, the SBA can come after your personal assets as a means of recouping any losses. You will need to have a fair to good credit score and established income or assets to qualify as a guarantor.
7. Not be a business in an excluded industry. Some types of businesses cannot be purchased with SBA loans, but most of the companies that are prohibited are not traditionally online businesses. Internet-based companies that do not qualify for SBA loans include:
- Online banks, finance companies and short-term payday loan firms
- Any type of business that involves pyramid distribution plans. This doesn’t necessarily mean only illegal pyramid schemes. Some home-based businesses that involve recruiting other representatives may be seen as pyramid distribution schemes.
- Online gambling sites and betting parlors
- Any type of online business that limits memberships for reasons beyond paying dues or a fee
- Online businesses related to any religious faith
- Online pornography sites
- Any online business related to lobbying or politics
Whether you wish to buy or sell an online business, Internet business brokers can be valuable partners, helping with searches, financing and valuation. Contact us for more information about how we can assist you.