If you’re considering getting into the acquisition entrepreneur game, there are several options for securing a loan. Here’s a look at how to get a loan to buy a business.
Buying an existing business can be a highly effective investment strategy as it is generally considered less risky than launching your own.
Most startups fail. One in five within the first year, half within five years and around 65 percent after ten years.
Instead, think about buying an existing business that has a proven track record of profitability using any of the loan options available.
Where Can You Get a Business Loan?
There are a variety of options available for getting business financing to purchase an existing business.
One of the most popular options is a Small Business Administration (SBA) loan, which guarantees a portion of the loan from a traditional lender like a bank.
You can also apply for a loan directly from those traditional lenders like a bank or a credit union.
There are also online lenders that offer quick turnarounds but usually less money and higher interest rates.
You can also ask for seller financing and negotiate directly with the current owner of the business.
All these options have their own advantages and disadvantages (more on that below).
Check your eligibility
Buying an existing business is generally considered less risky than launching a startup, you’re buying something that already has a proven track record of profitability.
Accordingly, getting a loan to buy a business is usually easier than getting funds to launch a startup.
The lender is going to scrutinize your finances and experience in the industry that you’re buying into. Having an MBA can also be helpful to show that you have the general business knowledge to succeed.
Different lenders will want a different credit score, from the high 600s for most loans to the low 600s for online lenders.
You will generally be expected to pay between 10 and 30 percent of the purchase price.
Gather the required documents
It is helpful to gather all the documentation you’re going to have to produce ahead of time to streamline the loan application process.
Things to gather include:
- Credit score
- Personal bank statements
- Two years of tax returns
- Any current debts you hold
If you already own a business and are looking to buy another one or to expand, they will also want to see financial statements (profit and loss, balance sheets, etc.), tax returns for the business, its credit score and bank statements.
You’ll also want to gather a lot of information about the business you’re hoping to acquire, including:
- Valuation of the business you want to buy
- That the business has the appropriate licenses and permits to operate
- Your business plans
- Three to five years of financial projections
Choose a business acquisition loan
Let’s take a closer look at some of the options when it comes to actually getting a loan.
One of the most popular choices for getting a loan to buy a business is a SBA loan. They offer favorable repayment terms and relatively low interest rates.
You can use the 7(a) program to borrow up to $5 million to acquire a business. There are several other loans available you can read about here.
The SBA usually expects a credit score of 670 to qualify.
You can acquire an SBA loan for as little as ten percent down.
The SBA doesn’t give you the money but rather they guarantee the loan, and the money is provided by a traditional lender.
Traditional business term loan
A traditional business term loan is when you apply for a loan through a bank or credit union. These loans also come with favorable terms –depending on your financial situation — compared with online loans (more on this below).
Banks will generally ask for more collateral than an SBA loan and will generally want to make sure that the business you’re buying has substantial assets, and your finances are solid.
Online business term loan
Applying for an online business term loan is generally a little easier.
There are several companies that offer loans, including ondeck and bluevine.
They usually have less stringent financial requirements than traditional options so they may be an option if you have not so great credit score.
The process moves much quicker as well, some issuing money on the same day. However, as a result they generally charge higher interest rates.
Most of the online lenders offer between $5,000 and $500,000 and a credit score in the low 600s.
Seller financing is very common when purchasing a business and can be used in conjunction with any of the options above. You might get 10 percent of the purchase price in seller financing.
You’ll need to negotiate all the key provisions with the seller – interest rate, fees, term, late payment penalties, etc. – the same way you would with a bank, for example.
Submit your application
Now it’s time to submit your application, whether in person or online.
The approval time varies from lender to lender, but you’ll receive a loan agreement to sign before they issue funds.