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How to Get a Loan to Buy a Business

by Mike Abelson   October 7, 2021
Starting your own business may be risky, challenging, and time-consuming. That’s why many opt to buy a company that is already established. There are many options, such as an SBA loan or a business line of credit, that may help finance the purchase of an existing business.
Loan Advice Business Tips

Starting your own business may be risky, challenging, and time-consuming. That’s why many opt to buy a company that is already established. However, most people don’t have the cash readily available and may need a loan to buy a business. There are many options, such as an SBA loan or a business line of credit, that may help finance the purchase of an existing business.

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What Type of Business to Buy?

Group of professionals in a meeting shaking hands.When you want to acquire an existing company, it is best to buy a business in an industry that you have some experience in. Focusing your search on companies that you can apply your skills and work history to may increase the chances of success. The transition may also be relatively easier if the business is in your field of expertise.

Choose a business that aligns with your goals, budget, and resources. It may also be helpful to hire specialists such as a business broker to help assist in the acquisition. An accountant may also support you in the financial realm by checking the balance sheet and possible unpaid invoices. Finally, a lawyer can also facilitate negotiations and legalities.

Successful business mergers, takeovers, and purchases happen every day. Take, for example, when Disney acquired Pixar Entertainment in 2007. The purchase cost Disney a whopping $7.4 billion. Was it successful? According to Observer.com, since being acquired by Disney, Pixar has released 16 movies that have generated $11 billion. So there is no reason for Disney to have buyer’s remorse over this one.

Disney buying Pixar made so much sense because the two companies were a great fit. Disney had already established itself as the top source for family entertainment. However, the company did not have a handle on Pixar’s unique brand of computer animation. By acquiring Pixar, Disney was able to control what was already the most successful brand in a newly emerging niche, which has continued to grow over time.

Is Loan Acquisition Better Than a Startup Loan?

Professionals standing front of business planning materials.A loan acquisition is a loan to purchase another business, while a startup loan is used to start a new business. Only you, as a buyer, can decide which loan option is right for you. To help you find an answer, consider the following questions.

  • What skills can I contribute?
  • What experience do I have in business?
  • Am I familiar with different business systems?
  • What kind of resources and connections do I have available?
  • How much control do I want to have over the business?
  • How creative do I want to be with my business?
  • Do I have an original business idea?

Advantages and Disadvantages of Buying a Business

Professional looking at annual report.As you shop around for a company to buy, understand why it is actually for sale. Then, weigh the advantages and disadvantages of loan acquisition.

Pros

  • The business may already have a place in the market
  • The firm has a good reputation attached to it
  • Inherit existing cash flow and systems in place to sustain it
  • Employees and suppliers are established
  • May receive training and consultation from the previous owner
  • Equipment is installed
  • Inventory is in place
  • Immediate income
  • The business may continue to be successful
  • The company may already have the best location
  • Trade credit is established

Cons

  • Buying an existing business may be expensive
  • The firm has a bad reputation attached to it
  • Clients may not transition well
  • The business systems could have weaknesses that require time and effort to correct
  • Inefficient equipment and facilities
  • Lousy management from the previous owner
  • Employees may be unsuitable
  • Bad location

Earlier, we said that successful acquisitions happen every day. However, there’s another side to that coin. Take Quaker Oats, owner of the popular sports drink Gatorade, which purchased Snapple back in 1994 for what Wall Street said was $1 billion too much.

It turned out that while Quaker Oats knew what it was doing with sports drinks, it did not bring any skill sets or expertise to the table to help Snapple grow. And so, Snapple shrunk, its revenues dropping from $700 million to $500 million in 27 short months. At that time, Quaker Oats sold Snapple for just $300 million, a fraction of the $1.7 billion they had paid for it.

Loans to Buy a Business

After analyzing your skills, abilities, and interest, explore your financing options. Below are seven types of loans to finance a business acquisition.

Seller Financing

Seller financing or owner financing is an alternative financing option for borrowers with lower credit scores who struggle to qualify for a traditional loan. Instead of going to a traditional lender to get a conventional business loan, the seller will function as a bank and provide business financing. In exchange, the buyer pays back the principal amount and interest. The buyer’s relationship with the owner will determine how much financing they may get, the repayment term, and the interest rate. This type of financing is common with a small business acquisition.

Rollovers for Business Start-Ups (ROBS 401K)

A ROBS 401K is another financing option for business acquisition. This option allows you to utilize the funds in your retirement plan to buy a business. Eligible retirement accounts that can be used as capital include an IRA or 401(k). If you’re younger than 59-and-a-half, you won’t incur tax penalties or an early withdrawal fee.

Private Investors

Two investors looking over stocks.Private investors are suitable for all types of businesses. They can be angel investors, private equity financing groups, or large institutions. These private investors may be interested in financing your company to contribute to its growth. However, investors typically receive around 20% to 40% return on the money they invested in your business.

Bank loan

A bank loan is one of the most common methods of acquisition funding. They come in many forms, such as a secured loan, SBA loan, real estate loan, line of credit, lease, equipment financing (or equipment loan), personal loan, and more. To get a loan from a financial institution, the buyer needs to present a personal guarantee. In case the business defaults, the buyer as an individual is responsible for paying the loan back.

SBA Loan

Another great financing option for business acquisition would be to apply for an SBA 7(a) loan. To qualify, you need to have a very high credit score (at least 680) and shouldn’t have much personal debt. If you don’t have a high credit score, consider finding a co-signer with a high credit score, high net worth, or assets to use as collateral. The loan program also requires a down payment of at least 10% of your total loan amount, and the loan term depends on the amount borrowed. An SBA Express loan is very flexible; however, the business that you want to buy must have good accounting records.

Moreover, with an SBA 7(a) loan, you can purchase a franchise. Franchise loans are helpful if you don’t have enough business experience because they can provide you with the support and training you need to be successful.

Business Line of Credit

This type of business financing is relatively flexible and gives you easy access to cash. The borrower is approved to receive a set amount of money, and they can utilize the funds whenever needed, as long as they don’t exceed the approved limit.

This type of business acquisition loan has a variable interest rate, and the borrower only pays interest on the amount they borrow. Primarily, this loan is used for short-term purchases such as equipment financing.

How it works is as the borrower uses the money, their line of credit decreases. However, the line of credit increases to become available again as the borrower repays the money. Qualifying for a business line of credit may depend, in part, on the business credit score rather than just the borrower’s personal credit score.

Term Loan

A term loan is similar to a small business loan or a microloan. You will receive a fixed amount of cash that you have to pay back with interest on a fixed repayment schedule. Term loans are usually borrowed for shorter terms because they have higher fees and quicker repayment periods. The loan application is relatively easy, and you can use the funds to address any business-related expenses.

Sum Up

When searching for financing options, shop around to find the best loan option for you. Business acquisition is generally considered less risky than starting your own business, especially if you buy a business that is already profitable. Luckily, there are many types of loans to buy an existing business that meet the needs of different buyers.

Mike Abelson   Editorial Director
Mike is the Editorial Director at Lendza. He enjoys helping entrepreneurs and startups succeed through smart, innovative strategies. He’s partnered with CEOs and executives to grow businesses from the ground up. Before his work at Lendza, Mike was a stock market analyst. When he’s not traveling for work, he enjoys reading adventure and science fiction novels.