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Starting a business from scratch is a massive undertaking. Some entrepreneurs skip it entirely by buying an existing business, expanding their operations, or absorbing competitors. Doing this has advantages, including the perks of buying into an already established operation.
Getting financing for this type of purchase is easier than you might imagine. In fact, getting financing for buying an existing business is often easier than getting it for starting a new operation. If you have a proven track record as a business owner, you should be able to show lenders that you are creditworthy and a safe investment.
How to qualify for a loan to purchase a business
Whether you currently own a business or this will be your first rodeo, the lender will want to know more about the company you’re hoping to acquire. You’ll also need the following to convince lenders you’re worthy of funding:
You should have a relatively clean personal credit history and a good or excellent credit score. A few blemishes on your credit report or a lower credit score don’t mean you’ll automatically be denied a loan. Still, if approved, the borrowing costs will likely be higher.
Other businesses owned
If you own other companies, the lender will likely view your business credit history and score to determine if it’s positive. Your business credit history should be free of late payments, foreclosures, liens and bankruptcies to get approved for a loan.
The lender wants reassurance you’re entering an industry you know. So, you should have proof of work experience or extensive training in the field before applying.
Information about the business you want to buy
The lender will want to know more about the company you’re hoping to acquire. Lenders will likely ask questions like:
- What is the business worth?
- Is the sale asking price reasonable?
- Is the company operating profitably?
- How much debt is owed to creditors?
- Are there any delinquent accounts?
You’ll need to answer these questions during the loan application process, and the current owner should be able to provide this information.
Preparing to apply for a business acquisition loan
Before researching lenders and formally applying for financing, you’ll also need to gather specific documentation.
Personal information and documents the lender will request include:
- Your name and Social Security number
- Recent tax returns and bank statements
- A business plan that outlines your operational plans and funding needs
- A letter of intent detailing the terms and conditions of the proposed acquisition
- Financials for other companies you own (if applicable)
It’s also helpful to have these business documents handy:
- Requested loan amount and purpose
- Employer identification number
- Recent tax returns
- Business financials, including the most recent balance sheet and profit and loss statement
- Three to five years of projected financials
- Asking price for the business and an itemized list of what’s included in the sale
- Proposed bill of sale, or the legal document that will be used to transfer ownership of the company
Be mindful that this list is not exhaustive. Some lenders may request additional documents or information not listed here, so it’s worth inquiring before you apply to avoid hiccups in processing your loan application.
Types of loans for purchasing a business
Several funding solutions are available through traditional banks, credit unions and online lenders to purchase a business. Or, the seller may offer to finance the transaction to simplify the process.
Business term loans are available through most financial institutions and online lenders. You’ll typically need to meet the lender’s requirements for credit score, minimum time in business and annual revenue.
Traditional banks and credit unions often have stringent requirements but offer more favorable terms, including lower interest rates. Getting approved by a traditional lender can sometimes be more difficult if you do not have substantial assets and solid credit.
You may find more flexibility with online lenders offering business loans. Alternative lenders often offer more lending options than traditional lenders as they cater to a variety of borrowers. Alternative lenders often have flexible requirements and provide bad credit business loans. The flexibility can come at a cost, though, as you may be subject to a higher interest rate. Additionally, online lenders generally offer faster funding times, a significant upside if you want to purchase immediately.
Backed by the U.S. Small Business Administration, SBA loans are worth considering. They’re offered through banks, credit unions and online lenders approved by the SBA to administer loans and come with competitive loan terms.
To qualify, you don’t need perfect credit — a FICO credit score of at least 670 may suffice with some lenders. However, a higher score means you’ll qualify for more favorable loan terms. But SBA loans have a significant downside as the funding timelines are notoriously lengthy. You could be better off exploring other options if you’re looking to buy a business in the next month or two.
This solution involves a financing arrangement between the seller of the business, and you, the buyer. The written agreement should include the purchase price, interest rate, loan term, payment amount, due date, fee schedule and other information applicable to the business’s sale.
This funding method may be best if the seller offers exceptional financing terms. Still, you’ll likely need to prove you’re a creditworthy borrower to seal the deal.
Applying for a business acquisition loan
When you’re ready to apply for a business acquisition loan, follow these steps to help make the process more seamless:
1. Determine if you’re eligible for funding. Eligibility guidelines vary by lender. But as mentioned above, most have a credit score, time in business and annual revenue requirement. Research lenders to find those with loan products you may qualify for.
2. Select the right loan product. After scoping out lenders, compare terms and fees. The one offering the lowest interest rate may not be the best choice if they charge high origination fees. And don’t forget to consider online lenders if you need a loan solution with more flexible eligibility guidelines or faster funding times.
3. Gather your personal and business documents. Reach out to the lender to find out if there are documents you’ll need to provide when you apply that aren’t mentioned in the list above.
4. Apply for a loan. Complete all components of the application and review for accuracy before submitting. Omissions or errors could result in a denial.
If approved, review the loan agreement and disclosures before signing on the dotted line to ensure you’re fully aware of the terms of conditions. Doing so also helps avoid surprises once you’ve entered into a legally binding agreement and the funds are disbursed.
The bottom line
Securing a loan to buy an existing business is often easier than getting financing for starting a new business. Prepare to show your history as a business owner and answer questions about the finances of the business that you’re planning to acquire. Find the right lender to fit your needs and terms that work for you, and you should be able to move forward with your purchase.
Frequently asked questions about loans to purchase a business
It depends on the lender’s guidelines. The process should be straightforward if you meet the requirements and provide the requested documentation. But securing funding may be difficult if you have past credit issues, minimal industry experience or the lender has concerns about the financial health of the company you plan to acquire.
Several business loan options do not always require a down payment, including term loans, lines of credit and microloans. You can keep your hard-earned money in your pocket when accessing funding, but this perk comes at a cost, typically in the form of steeper borrowing costs and fees.
Traditional banks, credit unions and online lenders extend loans to buy a business. The best lender for you depends on their offerings and eligibility criteria. You’ll usually find that banks and credit unions are less flexible with lending guidelines than online lenders, but online lenders may assess higher interest rates.
Yes, getting a small business loan with a lower credit score is possible if you meet the lender’s revenue and time in business requirements. However, your options will be limited, and you can expect high interest rates. Some lenders may also only extend secured loan offers to risky borrowers.