How to Get a Loan to Buy a Business
| April 2022
The road to entrepreneurship is often daunting. Starting a business is a huge task with many risks.
A good way to step into owning a business while avoiding a lot of the legwork and upfront risk of starting your own venture from scratch is to simply buy one. Doing so means you’ll have an established base of customers, a brand that already attracts sales, and operations that are ideally running smoothly.
Purchasing a business is expensive, however. Only 1 in 15 entrepreneurs looking to buy a business ever complete the transaction, according to Richard Parker on Forbes.com. To buck the trend and be successful, you may need to get a loan.
It’s important to know what getting a loan entails and how to present your creditworthiness and goals to a loan officer. What is the best way to go through the process? Work with an experienced business broker who can help you get the best loan terms possible from the start.
Choose a Source of Capital
Before you get a business loan, it’s best to be prepared with knowledge of what lenders are looking for, how to show them you’re worthy of their trust, and what kind of loan is best for your situation.
The first step is choosing a source of capital that meets your needs and qualifications. There are many different ones you can tap into, one of which may be a better fit for your business-buying ambitions than the others.
Traditional banks are a good potential source for loans, but many of them have strict requirements for individual investors. You will need to demonstrate a great credit rating.
| Credit Unions
Credit unions have the advantage of being smaller, which means they may more carefully evaluate your individual goals and eligibility. They also offer lower interest rates than many banks.
| Online Lenders
Online lenders in the fintech (financial technology) space, like LendingTree, Biz2Credit, and Fundera, are helpful loan sources for many first-time investors and entrepreneurs. They may lower the barrier to getting loans with fast approvals and slightly less-stringent requirements than banks and credit unions.
| Seller Financing
Often, a business owner will be open to helping a buyer by financing the transaction. In this arrangement, buyers have time to pay for the business in installments. While the seller does collect interest, seller financing allows buyers to skip the loan application process entirely.
| A Small Business Administration (SBA) Loan
A special category of loan from the US Small Business Association, called an SBA 7(a) loan, is helpful for business buyers seeking lower interest rates.
Lenders are more likely to employ this kind of loan because they are fully backed by the SBA in case the borrower defaults. The lender will also investigate the business’ viability as part of the approval process, making an SBA loan for the purchase of an existing business easier to get than a loan to build a brand-new venture.
An SBA 7(a) loan can also help you purchase commercial real estate and refinance existing debts.
| Personal Funds
Depending on how much money you have saved up or the total value of personal assets you can liquidate, you may not need to seek a loan at all to buy the business you’re interested in. You can simply use the cash you have on hand to make the purchase.
For most investors and entrepreneurs, however, using a loan to buy a business will be the way to go. First, it’s important to learn what most serious lenders are looking for.
Get Familiar With Lender Requirements
Lenders, especially traditional ones like banks, often want to see that business buyers are capable of two things: paying back a loan and running a business.
You will have an easier time getting a loan if you have a high personal credit score plus solid financials that show you’re responsible for handling debts. The benchmarks will be different for each lender, but it helps to have a credit score of at least 680, a good standing with creditors, and a long track record of on-time payments.
It also helps if you have several years of experience owning and managing a business. It’s even better if the venture was in the same industry or vertical as the one you’re proposing to buy.
For example, lenders might be reluctant to give a loan to someone who only has experience in managing a coffee shop but wants to buy an electrical contracting business. That is unless you can show years of study, apprenticeship, and general preparation for the latter.
Finally, consider whether you have collateral you can offer as security for the loan. This becomes more important the lower your credit score is, and it can help your case when approaching lenders. Collateral may include your home, commercial equipment, a car, or accounts receivable.
Gather Your Documents
In most cases, getting a loan to buy a business requires that you provide bank statements, the last two years of your personal tax returns, detailed lists of personal debts, and financial statements (including cash flow statements, balance sheets, and P&L statements) of other companies you’ve run.
Working with a broker early on in the process is a smart course of action. A good broker can help you determine your eligibility for the best loans, decide on a funding source to go after, and gather all the documentation you need to help ensure your application is timely and successful.
After doing the preparation, it’s time to apply for the loan itself.
Applying for a Loan to Buy a Business
After you’ve decided to go forward with buying the target business and you’ve chosen a lender, there are several important steps for completing your loan application.
Draw Up and Present the Necessary Documents
Part of applying for the loan you receive is to do your due diligence as a buyer. This helps reassure the lender that buying the business is a sound financial decision, which lowers their risk of extending you the loan.
You’ll have to create some key documents to transact with the seller of the business, including a Letter of Intent (LOI), a business plan that details all the changes you intend to make as the owner, and a business valuation.
The professional business valuation is a detailed assessment from a broker on how much the company is worth. Being such a crucial part of your application, the valuation should be done by an experienced broker who can give you the full rundown of your investment’s soundness — and will stay by your side as you get the loan and move into the closing process.
Consider Making a Down Payment
By making a down payment, you can substantially reduce the amount you’ll have to borrow. In turn, you’ll reduce your overall debt as a byproduct of acquiring the business and can speed up your path to profitability as the new owner.
Bring Additional Value to the Table
If you have specific industry expertise, personal connections, equipment, growth strategies, or other value-adds, you can bring to the business. This may help you in both getting approved for the loan and securing it at a competitive rate.
A savvy broker can help you determine what soft and hard assets you can bring to the table to lock in the best loan terms, as well as your overall financial outlook as a new business owner.
Work With Raincatcher
If you’re thinking about how to get a loan to buy a business, it makes sense to talk to a broker. That is, a broker with the experience and know-how to help you determine your eligibility for a loan, the right lender to go with, and how to get the best interest rates.
The professional brokers at Raincatcher have many years of experience in helping entrepreneurs and investors acquire healthy businesses. This includes helping them get the best loans possible at the most favorable terms.
If you’re looking to buy a business and want to secure a great loan, speak to a professional broker at Raincatcher today.