Securing a substantial loan to buy a business is often essential when you aspire to acquire an existing business. Whether it’s to foot all or a portion of the initial purchase price, a variety of small business financing options are at your disposal. You may explore routes such as SBA loans, bank loans, or seller financing, not to mention modern online platforms such as Fundera and Lendio that specialize in facilitating loans to buy a business.
To learn more about buying an existing business, download your free copy of BizBuySell Guide to Buying a Small Business. You can also download the free ebook BizBuySell Guide to Selling Your Small Business for small business owners seeking a buyer for an existing business.
Be sure to check out this video from Credit Suite that shows how to get a loan to buy a business:
How to Get a Business Acquisition Loan
One way to buy an existing business is through a business acquisition loan. Below, we outline some types of business acquisition loans available and some things you’ll need before you even get started looking for a loan to buy a business.
Requirements for the Loan Application Process
Small Business Deals
To begin with, here’s a list of application requirements and information that will be examined during the loan application process.
In order to get a loan to buy a business, you’ll need to prove the business’s financial stability. Financial records go a long way. This generally includes things like bank statements, current debt, and income. They demonstrate your ability to repay a lender.
Lenders want to know that their investment in your loan is safe. So they generally won’t give you more money than a business is worth. As such, you’ll need to provide proof of the business’s value. This can be calculated using multiple factors, including revenue, assets, cash flow, and market analysis.
A business plan is what demonstrates your ability to continue running the business profitably. This type of plan generally includes your market, product or service, competitive analysis, and strategies for growth and marketing. You also generally need to submit a business plan when getting a loan to start a business. So, it’s a similar requirement for business acquisition.
What is the business expected to bring in moving forward? This obviously has a major impact on your ability to repay a lender. It’s common to use current revenue to create these projections. But there may also be other factors that you could use to demonstrate the likelihood of future growth. For example, if your new business is in an emerging industry, use industry market projections to back up higher earning projections. Some due diligence can go a long way toward demonstrating your potential future earnings.
Track Record and Experience of the Borrower
It’s not just the business’s finances that your lender will want to analyze. They also want to know your own personal financial situation and experience. For example, if you’re debt-free and have successfully run businesses in the past, that bodes well for your ability to repay a business acquisition loan. However, excessive debt or a recent bankruptcy filing may serve as a red flag that makes it harder to secure financing.
When it comes to your personal finances, potential lenders will review multiple factors to get the entire picture. Basically, they want to analyze your personal financial stability to gauge your ability to repay the loan. Here are some of the most important factors they’ll look at when an entrepreneur applies for a business acquisition loan.
- Credit score: Your credit score takes a variety of factors into account, like your ability to pay bills and the amount of outstanding and open credit you currently have.
- Tax returns: Your tax returns outline your income and expenses from the past several years. This shows lenders where your current income stands and where it comes from.
- Outstanding debts: The more debt you have, the more difficult it may be to repay a business acquisition loan. This doesn’t mean you have to be completely debt free. But a lender is going to want to see a full list.
- Cash flow: Your ability to bring in money plays a big role in your ability to get a business loan. They’ll want to know your personal income cash flow and that of the business you’re seeking a loan to buy.
- Collateral: Sometimes, a little extra assurance is needed for a lender to feel comfortable granting a business acquisition loan. Your personal assets like your home or investment accounts may serve as collateral.
Loan Type to Buy an Existing Business
There are a variety of loan types when seeking financing to buy an existing business. Here is a brief overview of each.
Conventional Business Loan
A conventional business loan generally comes from a bank or other financial institution. They often provide a large lump sum of cash that you pay off over several years. Terms vary, but these loans can come with competitive rates.
However, they are often difficult for very small businesses and new entrepreneurs to obtain. Banks consider business loans for this type of borrower to be fairly risky. So they generally check multiple factors like your credit score, business history, business plan, and assets. And their standards are likely to be a bit higher than those of online or alternative lenders. They may also require you to put up significant collateral to lessen their risk.
Additionally, conventional loans often provide a large amount of funding — sometimes up to $500,000. This can be a positive for those looking for large business acquisition loans. But it’s often not ideal for small businesses looking for more manageable payments.
Seller Financing from the Business Owner
With seller financing, the current business owner essentially acts as the bank providing financing for the buyer. They offer a loan that covers all or part of the purchase of the business. And the buyer repays that loan in pre-agreed-upon payments over time, with interest. The interest rate is often comparable to that of an SBA loan. And sellers generally still check credit scores and financial records before offering loans.
For the buyer, this provides an option for acquiring a new business without having to provide all the cash upfront. And it’s ideal for those that may not qualify for traditional bank loans. For the seller, this allows them to get a slightly better price for their business since they’ll also be able to collect interest over time.
However, the arrangement does come with risks for both sides. Terms vary, but sellers are generally able to re-take ownership of the business if payments are missed for a significant period of time. However, many sellers only offer business acquisition loans if they’re fairly confident in their company’s ability to make money.
Rollover of ROBS Loan
ROBS stands for rollovers as a business startup. This type of loan involves using funds from a 401(k) or IRA retirement account to invest in a new business. But it can be used as a way to fund acquisition of am existing business too. It’s a complex option that requires an attorney or financial expert with experience in ROBS plans. Basically, you form a new corporation and set up a 401(k) for it. Then you can roll the money from your existing accounts into it and use it to fund the business.
This is an attractive option for some because it doesn’t involve interest. In fact, you don’t take on any official debt at all. It also does not involve the typical credit checks that come with applying for a business acquisition loan.
However, the risk for a ROBS loan is potentially losing your retirement savings. If the business you’re purchasing doesn’t work out, you’ve also lost your nest egg for the future. Additionally, this money being used to fund your operations means that it’s not growing in the market. This may be worthwhile if the venture works out. But if not, you’re missing out on years of potential gains.
Comparing Loan Types for Business Acquisitions
The table below highlights the distinct characteristics and implications of various loan types, offering a comprehensive guide to making an informed decision that aligns with your financial strategy and business objectives.
|Characteristic||Conventional Business Loan||Seller Financing||Rollover of ROBS Loan|
|Source of Financing||Bank or financial institution||Current business owner||Personal 401(k) or IRA|
|Interest Rates||Competitive rates||Comparable to SBA loans||Not applicable (No interest rates)|
|Loan Amount||Up to $500,000 (varies)||Varies (negotiable)||Depends on personal retirement savings|
|Approval Criteria||Credit score, business history, business plan, assets||Credit score, financial records||Not applicable (No credit checks)|
|Collateral||Often required||Possible (depends on agreement)||Retirement savings|
|Risk||High standards for approval||Risk of re-taking ownership if payments are missed||Risk of losing retirement savings|
|Flexibility of Payment||Fixed repayment terms||Negotiable (agreed upon with the seller)||Flexible (depends on business success)|
|Complexity||Moderate||Moderate||High (requires expert guidance)|
|Potential Benefits||Large amount of funding available||Allows for a potentially better price for the seller; Can be accessible to those who do not qualify for traditional loans||No interest; No official debt acquired|
|Potential Drawbacks||High standards for approval; Potential for significant collateral||Risk of instability if the business doesn't perform as expected||Risk of losing retirement savings; Missed potential market gains|
How to Get an SBA Loan to Buy a Business
Another of the financing options open to entrepreneurs seeking to make a business purchase is the so-called SBA 7(a) loan. Here are some details about this option.
What is a Small Business Administration Backed Loan?
An SBA loan is similar to a conventional business loan in that it is offered by a bank or credit union. However, the funds are backed by the U.S. Small Business Administration and are specifically set aside as small business loans. So the financial institution doesn’t have to take on as much risk. This allows banks to provide more opportunities for new entrepreneurs and small loans.
How to Qualify for an SBA 7(a) Loan
SBA loans are set aside for small businesses. And there are different types of SBA loans with clearly defined standards that vary by industry. But generally, you need to have fewer than 1,500 employees and less than $40 million in receipts each year. You also must be located or do business in the United States and operate for profit.
A borrower must also demonstrate the need for a business loan. This means you must have already invested personal assets before seeking a loan. And you must use the funds for a sound business purpose like operating expenses or growth.
Though your personal financial situation may not be quite as scrutinized with an SBA loan, you cannot qualify if you have outstanding debts to the federal government. And lenders can still consider your financial history when approving your application and deciding your interest rate.
Documentation Needed for an SBA Loan
Your bank or credit union will use a variety of factors to determine your loan eligibility and interest rate. Before applying for an SBA loan, gather the following documentation:
- Loan application: The SBA provides this application form to collect basic information from the borrower.
- Personal background and financial statement: These are also forms provided by the SBA. Complete the personal background statement and personal financial statement to provide information about your business and financial history.
- Business financial statements: When seeking a business acquisition loan, include the profit and loss statements and projected financial statements from the business you plan to purchase.
- Ownership and affiliations: Include a list of all proposed owners and affiliations you currently hold.
- Proposed bill of sale: Include the terms of the sale so the lender can confirm the intent to purchase and the amount needed.
- Loan history: Include any loans you’ve already applied for. This may include loans for the business and/or past ventures.
- Tax returns: Include your personal tax returns so the bank can confirm your income. And include at least two years of tax returns from the business to give them an idea of the income potential.
- Resumes from principals: Your professional history can impact the success of the business. So include your resume and resumes from any other principals who will be involved.
- Business overview: Include an explanation of the business and why the loan is needed.
- Lease: If there’s a physical location for the business, include the lease terms. If the business doesn’t yet have a lease agreement, include a proposed agreement signed by the landlord.
- Asking price: An application for a business acquisition loan should also include the proposed total sales price. Add a rundown of other costs like inventory, equipment, furniture, and fixtures.
Steps to Get a Loan Backed by the SBA
The process of applying for a business acquisition loan can vary from case to case. But there are some basic steps that apply to most entrepreneurs looking for SBA loans:
- Find an eligible lender: SBA loans are granted through third party lenders. Start by finding a bank or financial institution in your area that qualifies as an SBA lender.
- Gather your documentation: Go through the list of applications and documents above and gather them to submit to your lender.
- Wait for approval: Your lender will review your application and documents and submit them to the SBA. The SBA decides if they will guarantee the loan. And they work with the lender to agree upon terms.
- Close on the loan: If you are granted approval, you’ll need to agree on the terms. And you’ll have to complete any required extra steps like guaranteeing collateral.
Buying a Business with No Money Down
Finally you can buy a business with no money down. Here are the most popular methods.
Get Financing from Small Business Owner
As mentioned earlier, instead of getting an official business acquisition loan, you may secure financing from the current small business owner. Seller financing is often used to fund just part of a small business. But depending on your situation, they may provide the full amount that you can pay off over time.
This option does generally come with some interest. And you’ll risk losing the business if you can’t make payments on their terms. But small business owners often only offer to finance if they’re fairly confident in the business’s ability to earn.
Get Money from Friends and Family
You don’t necessarily need your own capital to pay for a business completely upfront. If you have friends and family who are willing to help, this can be an easy and low risk way to invest in a new business opportunity.
The risk with this type of business purchase is mostly personal. You may risk relationships or provide too much power to friends and family without business experience. This is why clearly outlining the terms before borrowing from friends and family is so important.
Get Funds from Leveraged Buyout
A leveraged buyout involves using borrowed money and using the assets of the company being purchased to cover the initial cost. For example, you might secure a business acquisition loan to cover part of the purchase. And then you can leverage the business’s equipment or real estate assets as collateral to secure a larger sum.
This allows you to complete a business acquisition with little to no money down. But it also means you won’t have much equity in the business early on.
How much can you borrow to buy an existing business?
The amount of money included in a loan to buy a business varies depending on what type of financing you seek. With a traditional business loan, you may be able to get up to $500,000. With smaller or alternative financing, you can borrow smaller amounts as little as $5,000.
The amount you’re able to get also varies depending on factors like your business and credit history. When securing a loan to buy a business, the company’s profitability and financial history will also play a role. The lender will want to know that you’ll easily be able to pay back the loan with your earnings.
What kinds of businesses can you buy with SBA loans?
The SBA can help you secure a loan to buy a business in a wide array of industries and niches. The main qualifications are that the business must be for-profit and have an established history of at least two to five years. It should also qualify as a small business under the SBA’s guidelines.
Other factors like your access to capital and credit history may impact your personal eligibility. And the business’s income and need for a loan may also factor in. But the actual industry or type of business should not affect your ability to get a loan, outside of its impact on potential profitability.
How do you start a business with no money?
Starting a business without much cash in the bank might sound like a tall order, but trust us, it’s far from impossible. With a sprinkle of creativity, a dash of resourcefulness, and a good dose of determination, you can certainly kick off your dream venture without burning a hole in your pocket. Here, we’re listing several methods you might consider if you’re thinking about taking the plunge without a big financial cushion:
- Exploring Government-aided Programs
- SBA Loan Programs: These are special loan programs facilitated by the Small Business Administration (SBA) to assist budding entrepreneurs. The SBA partners with lenders to provide loans with competitive terms and lower down payments to help kickstart your business.
- Grants: Depending on your business type and location, you may qualify for government grants. These grants can be a great way to secure startup capital without the pressure of repayment.
- Alternative Financing Platforms
- Fundera: An online marketplace that connects small business owners with the best funding providers. It helps you explore various loan options and find the one that suits your needs best.
- Lendio: Another online service that helps businesses secure loans by matching them with the appropriate lenders. It streamlines the loan application process and helps you access funds with more ease.
- Loans from Personal Network
- Family and Friends: Seeking financial assistance from family or friends can be a viable option. This method generally offers more flexibility in terms of repayment schedules and interest rates. However, it’s crucial to maintain professionalism by documenting the loan and setting clear terms to avoid future conflicts.
- Crowdfunding: Platforms like Kickstarter and Indiegogo allow you to present your business idea to the public. If people find your concept compelling, they can contribute funds to help you get started.
- Bootstrapping Techniques
- Utilizing Existing Skills and Resources: Start with what you have. Use your existing skills and resources to establish the business. This might include offering consulting services, crafting products by hand, or utilizing free online marketing channels.
- Lean Business Model: Adopting a lean business model can help in minimizing expenses. This means starting small, possibly from home, and gradually expanding as the business gains traction.
- Bartering Services: In lieu of monetary transactions, consider bartering services with other businesses. This can help save costs and foster valuable business relationships.
- Partnerships and Collaborations
- Finding a Business Partner: Collaborating with a business partner who can invest capital while you contribute skills, expertise, or resources can be a win-win situation.
- Strategic Alliances: Forming alliances with established businesses can sometimes open doors to resources and client bases without requiring upfront capital.
Starting a business without financial backing requires a blend of creativity, resourcefulness, and strategic planning. By exploring these options, you can carve out a path to entrepreneurship that doesn’t necessitate a hefty initial investment.
Lastly, no matter what method of financing you choose, it may be beneficial to start a business that doesn’t require much startup capital. For example, an online business without a physical location is going to require less upfront investment. So, even if you do need a loan to cover equipment or supplies, it should be easier to obtain the full amount.
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