Get a Loan to Buy a Business: Consider These 6 Financing Options

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.

Are you looking to start your own business? Many prospective entrepreneurs do, but they don’t want to invest the time or money to start a company from the ground up. But that doesn’t mean you can’t achieve your dream.

Approximately 50,000 companies were acquired in 2022. Why? The answer is simple. It’s a way to skip the risky early stages of a startup and move straight to running and growing an established business.

However, not every aspiring entrepreneur has the capital on hand to make such a significant investment outright. Thankfully, a variety of loan options exist to bridge this gap, including business loans to buy an existing business.

In this blog, we’ll help you understand how to get a loan to buy a business and explore the different avenues toward successful business acquisition.

How to Qualify for a Business Loan: Things That Lenders Consider

Securing a loan to buy a business is less about ticking boxes and more about presenting a compelling case for lenders. As an entrepreneur, you need to demonstrate not only your commitment to the venture but also its viability and profitability under your leadership.

Think of it from the lender’s perspective. They’re looking to minimize risk and ensure that the loan will be repaid on time. Lenders will evaluate your financial reliability, the business’s track record, and the industry’s overall health. Aligning your preparation with these core areas can position you favorably in the eyes of a potential lender, making it more likely you will secure funding to buy an existing business.

Important Aspects of Getting Qualified for a Loan

When it comes to what lenders are looking for, every detail counts. Here are the main factors that lenders evaluate when determining your eligibility for business acquisition financing:

• Credit Score: Obtain a copy of your credit report, review it for accuracy, and address any discrepancies before applying. A score of 700 or above is typically preferred. Lenders will also consider the credit history of the business to gauge its financial stability and payment history.
• Business Plan: Tailor your business plan to include market analysis, growth potential, and detailed financials. A well-crafted business plan provides lenders with a clear, strategic outline of how you plan to run and grow the company under your leadership.
• Industry Experience: Highlighting your industry experience can prove your credibility to manage and grow the business. Compile a portfolio with references and testimonials that showcase your past successes in business management.
• Financial Statements: Lenders will scrutinize the financial records of the business you’re looking to buy. Ensure all financial statements are up-to-date and accurately reflect the business’s performance, including profitability, cash flow, outstanding debts, and operational expenses.
• Equity Investment: Determine how much of your own funds you can commit. Your equity investment demonstrates your interest in the business’s success and reduces the lender’s risk by showing that you have significant personal financial commitment at stake. Lenders typically require at least a 10% to 20% down payment.
• Cash Flow Analysis: Develop comprehensive cash flow projections for the next three years. Cash flow projections estimate the amount of money expected to flow in and out of the business, forecasting its financial position and ability to maintain operations. Plan for different scenarios, including unexpected expenses or a dip in sales, to prove you can handle the loan during tough times.
• Collateral: Be prepared to discuss what you can offer as collateral against the loan. Collateral includes tangible assets you pledge to secure a loan, like real estate, equipment, or inventory. It provides lenders with a form of security that can be liquidated in case the loan is not repaid.

Pros and Cons of Buying a Business

When considering the pros and cons of buying a business, think of a local favorite restaurant or retail shop changing hands. Such acquisitions can come with instant brand recognition and a loyal customer base, presenting a valuable opportunity for growth. Yet, they also carry risks, such as inheriting legacy issues or managing existing staff expectations, which require careful navigation.

Consider how the following pros and cons could influence your own business buying journey.

Pros

Here are some of the advantages of buying an established business:

• Established market presence
• Good reputation that leads to instant trust
• Existing cash flow that fuels operations
• Trained staff and suppliers onboard
• Previous owner’s guidance
• Equipment ready and inventory stocked
• Potential income from day one
• Credit lines already set up

Cons

On the other hand, these are some of the obstacles you may encounter when looking for financing for buying a business:

• High upfront purchase price
• Existing negative public perception
• Risk of client transition
• Potential need for system overhauls
• Inheriting outstanding debt
• Unresolved issues from past management
• Possible resistance from current employees
• Fixed location may not be ideal

Loans to Buy an Existing Business

From seller-backed deals to government-assisted loans, each path to purchase comes with unique benefits and stipulations. There are certain steps to learn how to get a loan to buy a business, we explore the most common options below.

Seller Financing

In this arrangement, the business seller takes on the role of a lender and provides financing. In exchange, the buyer pays back the principal amount and interest. Seller financing offers a practical alternative for entrepreneurs, particularly if their credit scores are not optimal. The amount, repayment period, and interest rate are typically set by the seller or negotiated by the parties.

To secure a seller financing deal, negotiate terms you and the seller both find fair with the help of a lawyer and ensure all details are clearly outlined in a legal document. Consulting with a financial advisor can ensure the repayment terms won’t strain your cash flows.

This approach often allows access to financing without the stringent requirements and lengthy approval processes. It is a customizable and flexible lending solution, often resulting in a faster and less bureaucratic process compared to traditional loans.

Business Acquisition Loan

Business acquisition loans are designed specifically for purchasing an existing business. Acquiring an existing business can take many forms, including purchasing a competitor’s operations, opening a new location that another business previously owned, or even buying out a partner from a business you co-own.

These loans vary widely, with interest rates often starting at 5.5% and term lengths ranging up to 25 years. Loan amounts are typically between $5,000 and $5 million.  Banks, credit unions, and online lenders offer these loans and typically have terms tailored to the cash flow and profitability of the company being acquired.

What makes these loans particularly appealing is their flexibility. They are designed with the understanding that each business acquisition is unique, and they often come with the option to tailor the financing to specific scenarios, such as including funds for operational costs or immediate upgrades that the business may require.

Moreover, these loans can be secured against the assets of the business being acquired, which can sometimes result in more favorable terms, as the lender has a tangible asset to secure the loan against.

Bank Loan

Bank loans stand out as a popular choice for entrepreneurs looking to acquire a business due to their structured nature and relative stability. Typically, these loans offer a lump sum ranging between $250,000 and several million dollars.

The terms of bank loans for business acquisition extend from five to 10 years, providing borrowers with a long-term horizon to manage their cash flow and investment. Interest rates for these loans are usually competitive, with rates generally ranging from 5% to 10%.

Bank loans come with fixed repayment schedules, which means entrepreneurs can plan their finances without worrying about variable interest rates that can change with other types of loans. Additionally, banks often provide support and financial advice, which can be invaluable during the acquisition process.

This support, coupled with the potential for lower rates compared to other financing options, positions bank loans as a sound financial foundation for acquiring a new business.

SBA Loan

SBA loans are a strategic option for entrepreneurs eyeing a business purchase, offering a blend of sizable loan amounts and favorable terms. Entrepreneurs can access up to $5 million with SBA 7(a) loans, allowing for significant acquisitions.

These loans are notable for their lengthy repayment options – up to 25 years – giving business owners ample time to stabilize and grow their new venture. Interest rates are competitive, currently ranging from 11.5% to 15%, making them an affordable choice.

A key advantage of SBA loans is the SBA guarantee, which covers up to 85% of loans under $150,000 and 75% over that, encouraging lenders to finance small businesses. This guarantee, combined with the potential for lower rates and longer repayment periods, makes SBA loans an attractive funding mechanism for acquiring a business.

Moreover, for those seeking quicker access to funds, SBA Express loans offer up to $500,000 with a fast 36-hour response time after lender approval.

Term Loan

Term loans provide entrepreneurs with a one-time, lump-sum payment that can be used to immediately finance the purchase of a business. These loans range from $25,000 to $500,000, with fixed interest rates and a defined repayment schedule. Terms can span between one and five years, offering a predictable payment plan that aligns with business cash flows.

The interest rates for term loans may vary based on the borrower's creditworthiness and the lender's policies but generally fall between 7% and 30%. The distinct advantage of term loans lies in their collateral structure, often allowing the assets of the acquired business to serve as collateral. Given this security, lenders may offer more competitive loan terms and interest rates.

Where to Get a Loan to Purchase an Existing Business

With an understanding of the types of loans at your disposal, the next step is to identify where to secure the right financing for buying a business. These are some places you can turn to if you’re wondering how to get a loan to buy a business:

Banks

Banks are often preferred for business acquisition loans because they typically offer some of the most favorable terms, including lower interest rates and longer repayment periods, which can be particularly advantageous for an entrepreneur looking to acquire a business and needing time to integrate it into their operations.

Banks will review your credit history, business experience, and the financial health of the business you wish to acquire. They'll also look at your business plan to assess the viability of your proposal. Here's a deeper dive into the advantages and disadvantages:

Pros

• Lower interest rates mean more savings over time
•  Longer repayment periods can ease the initial financial burden
• Access to larger sums of money to finance substantial business purchases
• Banks often provide additional support, such as financial advice and business resources

Cons

• Stringent credit and financial requirements must be met
• The application process can be complex and time-consuming
• Collateral, often necessary, puts personal or business assets at risk
• Less flexibility in negotiating terms compared to alternative lenders

Credit Unions

Credit unions are another excellent source for business acquisition loans, particularly for members who seek a more personal touch in their financial dealings.

Credit unions often build a community focus into their lending practices, which can mean more personalized service. They evaluate your credit history, business acumen, and the financials of the business you’re targeting, similar to banks.  Here’s why they are worth considering:

Pros

• Potentially lower interest rates due to their non-profit status
• Personalized customer service with a focus on community support
• Often more flexible with loan terms and requirements than banks

Cons

• Limited availability; must be a member to access loan options
• Smaller loan amounts compared to banks, which may not cover all acquisition costs
• May have fewer resources and tools for business support compared to larger banks

SBA-Approved Lenders

SBA-approved lenders are financial institutions that have been authorized to offer loans in partnership with the Small Business Administration (SBA). These loans are backed by the SBA, which means that the agency guarantees a portion of the loan, reducing the risk for lenders and often leading to better loan terms for the borrower.

Here's what you need to know about the pros and cons of securing a business acquisition loan through an SBA-approved lender:

Pros

• Lower interest rates through SBA guarantee
• SBA support and oversight can mean more comprehensive borrower assistance
• Potentially longer repayment terms, easing cash flow concerns

Cons

• The application process can be lengthy with SBA-required paperwork
• May face strict use of fund restrictions based on SBA policies
• Slower processing times due to additional government review steps

Online Lenders

Online lenders are a modern solution for securing business acquisition loans, known for their speed and flexibility. They operate primarily through digital platforms, offering a streamlined application process. Here are the key pros and cons to consider:

Pros

• Quick application decisions with less paperwork, thanks to online platforms
• Accessibility for those who may not meet traditional bank loan requirements
• Innovative financing options that can be customized for various business needs

Cons

• Higher interest rates due to increased lending risk
• Shorter loan terms, which may result in larger monthly payments
• Limited personal customer service, which could impact the support available to borrowers

For those seeking online business loans, Lendza specializes in connecting borrowers with a variety of lenders, streamlining the search for a suitable business loan. Our process is designed to simplify your experience, helping you find potential online lenders offering the funds needed to purchase a business.

FAQ on Getting a Loan to Buy a Business

If you still have some unanswered questions about how to buy a business, check out this FAQ section below:

How Can I Verify the Reputability of a Lender for a Business Acquisition Loan?

Research the lender thoroughly. Check for reviews from other business owners, look for any reports with the Better Business Bureau, and confirm their licensing through state financial regulatory agencies. Additionally, ask for references and consult with financial advisors or attorneys familiar with business financing.

Is it Possible to Get a Business Acquisition Loan With Bad Credit?

While challenging, it's possible. Some lenders, particularly online ones, may have more lenient credit requirements. SBA loans also offer options for those with less-than-perfect credit.

How Long Does it Take to Get a Business Acquisition Loan Approved?

It varies by lender. Banks and credit unions may take several weeks, while online lenders could approve a loan in a matter of days. Keep in mind that loan approval is never guaranteed, and the lender will also conduct thorough checks to verify your eligibility.

Sum Up

The process of getting a loan to buy a business need not be daunting. From the versatility of seller financing to the robust support of SBA loans, each option offers unique advantages. Online avenues like Lendza streamline the process even further, simplifying the journey of finding a loan. With the right loan, your business aspirations are within reach.