Not all entrepreneurs start from scratch. Some buy already-established companies to avoid the strenuous start-up phase. Others with existing businesses buy to expand their operations or absorb competitors.

Securing financing isn’t as challenging as you might think. However, you should understand what’s needed to qualify for funding and the necessary steps to prepare your finances for a business acquisition loan. It’s also helpful to familiarize yourself with the lending process — from application to funding — before formally applying for a loan to purchase a business. 

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. What is it worth? Is the asking price reasonable? Is the company operating profitably? How much debt is owed to creditors, and are there any delinquent accounts? Be prepared to answer these questions and provide supporting documents to substantiate your claims. 

You’ll also need the following to convince lenders you’re worthy of funding:

  • Personal credit history and score. 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. 
  • Business credit history and score. If you own other companies, the lender will likely take a peek at 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. 
  • Business experience. 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. 

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. 

Term loans

Business term loans are available through most financial institutions and some 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. You may find more flexibility with online lenders offering business loans. The flexibility comes at a cost, though, as you’ll often get a steeper interest rate. Still, online lenders generally offer faster funding times, which is a major upside if you want to purchase immediately. 

SBA loans 

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 there’s a significant downside to SBA loans: 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. 

Seller financing 

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. 

FAQs 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 or minimal industry experience, or if 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 and 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.