Buying a business can be an exciting venture, but figuring out how to get financing to buy a business often feels overwhelming.
At Unbroker, we understand the challenges entrepreneurs face when seeking capital for business acquisitions.
This guide explores various financing options, from traditional bank loans to innovative alternatives, helping you make an informed decision for your business purchase.
How Traditional Bank Loans Work for Business Acquisitions
SBA Loans: Government-Backed Financing
When you consider financing a business purchase, traditional bank loans stand out as a popular choice for entrepreneurs. These loans come in two main types: Small Business Administration (SBA) loans and conventional bank loans.
SBA loans receive partial guarantees from the U.S. Small Business Administration, which reduces risk for lenders. This often results in more favorable terms for borrowers. The SBA 7(a) loan program suits business acquisitions particularly well, offering up to $5 million in funding.
In fiscal year 2022, the SBA approved over 47,000 7(a) loans totaling $25.7 billion. The average 7(a) loan amount reached $547,519, demonstrating these loans’ capacity to cover substantial business purchases.
Conventional Bank Loans: Direct Financing from Financial Institutions
Conventional bank loans come directly from banks without government backing. These loans often have stricter requirements but can process faster than SBA loans.
Advantages and Challenges of Bank Financing
Bank loans offer several benefits for business buyers. They typically feature lower interest rates compared to alternative financing methods. As of March 2025, average SBA loan interest rates range from 7.5% to 10%, while conventional bank loans for business acquisitions average between 5% and 9%.
However, bank financing presents its own set of challenges. The approval process can take time and demand extensive effort. Banks often require comprehensive documentation, including detailed business plans, financial projections, and personal financial statements.
Additionally, banks typically expect a significant down payment (usually 20-30% of the purchase price). This requirement can present a substantial obstacle for many buyers.
Meeting Bank Requirements: Key Factors
To qualify for a bank loan, you must demonstrate strong creditworthiness and business acumen. Most banks look for a personal credit score of at least 680 for conventional loans and 650 for SBA loans.
Banks also scrutinize the business you plan to purchase. They want to see at least three years of profitable operation and solid financial records. The business should have a debt service coverage ratio (DSCR) of 1.25 or higher, indicating its ability to cover loan payments.
Collateral plays a crucial role as well. Banks typically require collateral worth 100% of the loan amount. This can include business assets, real estate, or personal assets.
The Role of Collateral in Bank Loans
Collateral serves as a safety net for banks, reducing their risk in case of default. Common forms of collateral for business acquisition loans include:
- Business assets (equipment, inventory, accounts receivable)
- Commercial real estate
- Personal assets (home equity, investments)
Banks will assess the value of your proposed collateral and its liquidity (how quickly it can be converted to cash). The stronger your collateral position, the more likely you are to secure favorable loan terms.
While bank loans offer a solid financing option for many business buyers, they represent just one piece of the puzzle. In the next section, we’ll explore seller financing as another potential solution for funding your business acquisition.
How Seller Financing Works in Business Acquisitions
The Basics of Seller Financing
Seller financing provides a flexible alternative to traditional bank loans when purchasing a business. This method involves the seller acting as the lender, allowing the buyer to pay for the business over time.
The Mechanics of the Deal
In a typical seller-financed transaction, the buyer makes a down payment (usually 10-30% of the purchase price) and signs a promissory note for the remainder. The note outlines the repayment terms, including interest rate, payment schedule, and duration.
For example, if you purchase a $500,000 business, you might pay $100,000 upfront and finance the remaining $400,000 with the seller over five years at 6% interest. Your monthly payments would amount to around $7,730 (excluding any balloon payment at the end of the term).
Benefits for Buyers and Sellers
Seller financing creates advantages for both parties. Buyers benefit from easier qualification processes and potentially lower interest rates compared to bank loans. Interest rates for seller-financed deals often range from 5-8%, while bank rates for business acquisitions typically start at 7-8%.
For sellers, offering financing can expand the pool of potential buyers, potentially leading to a quicker sale and higher purchase price.
Key Elements in Negotiating Terms
When negotiating seller financing, focus on these important aspects:
- Interest rate: Try to secure a rate competitive with current market rates.
- Down payment: Typically 10-30% of the purchase price.
- Repayment term: Usually 3-7 years, with potential balloon payments.
- Security: The business itself often serves as collateral.
Consider including performance-based adjustments in the agreement. For instance, you might negotiate lower payments if the business underperforms or accelerated repayment if it exceeds expectations.
Legal Considerations
Engage a business attorney to review the agreement. While seller financing offers flexibility, a well-structured deal protects your interests. The attorney can help you navigate complex terms and ensure the agreement complies with relevant laws and regulations.
As we move forward, let’s explore alternative financing methods that can complement or replace traditional loans and seller financing in business acquisitions.
Beyond Traditional Financing: Innovative Options for Business Buyers
Asset-Based Lending: Leveraging Business Value
Asset-based lending (ABL) allows you to borrow against the assets of the business you’re acquiring. This method works well for companies with significant tangible assets like inventory, equipment, or accounts receivable.
ABL typically offers higher borrowing limits than traditional loans. You might secure up to 80% of the value of eligible accounts receivable and up to 50% of inventory value. Interest rates for ABL usually range from 7% to 17% (depending on the lender and risk profile).
One major advantage of ABL is its flexibility. As your business grows and acquires more assets, your borrowing capacity increases. However, ABL often comes with stricter reporting requirements and may involve higher fees than traditional loans.
Equipment Financing: Funding Specific Assets
If the business you’re buying relies heavily on expensive equipment, equipment financing can be a smart choice. This method allows you to purchase necessary machinery or technology without depleting your working capital.
Equipment loans typically cover 80% to 100% of the equipment value, with terms ranging from 2 to 7 years. Interest rates vary but often fall between 6% and 9% for well-qualified borrowers.
A key benefit of equipment financing is that the equipment itself serves as collateral, potentially making approval easier than with unsecured loans. However, you should avoid over-leveraging on equipment that may quickly become outdated.
Crowdfunding: Tapping into the Power of Many
Crowdfunding platforms now offer opportunities for business acquisitions. Equity crowdfunding allows you to raise capital from a large number of investors, each contributing a relatively small amount.
Platforms like CircleUp and SeedInvest specialize in helping established businesses raise funds. These platforms typically charge a fee of 5% to 10% of the total amount raised, plus equity in your company.
While crowdfunding can provide access to a broader pool of investors, it requires a compelling pitch and often involves giving up some equity in the business. It’s also a very public process, which may not suit all acquisition scenarios.
Peer-to-Peer Lending: Direct Access to Investors
Peer-to-peer (P2P) lending platforms connect borrowers directly with individual or institutional investors. For business acquisitions, some platforms offer loans up to $500,000 with interest rates starting around 11.29%.
P2P lending can be faster than traditional bank loans, with some platforms providing funding in as little as 10 days. However, interest rates can be higher, especially for borrowers with less-than-perfect credit scores.
Private Equity and Venture Capital: For Larger Acquisitions
For larger deals or buyers with ambitious growth plans, private equity (PE) firms or venture capital (VC) investors might be options. These investors typically look for businesses with strong growth potential and often invest $5 million or more.
While PE and VC can provide substantial capital and valuable expertise, they usually require giving up significant equity and control in the business. They also tend to have a shorter investment horizon (3-7 years) and expect high returns.
Final Thoughts
Financing a business acquisition requires careful evaluation of various options. Traditional bank loans, seller financing, and alternative methods like asset-based lending each offer unique advantages and challenges. The right approach depends on your specific situation, the target business, and your long-term goals.
Professional guidance from financial advisors and industry experts can help you craft a tailored financing strategy. Thorough research and due diligence on the target business are essential steps in the process of how to get financing to buy a business. A solid business plan will support your financing applications and increase your chances of success.
Unbroker offers innovative solutions for entrepreneurs seeking to streamline the business acquisition process. Their platform provides transparent, low-cost options for business transactions, eliminating high brokerage fees while maintaining access to a vast network of potential buyers and sellers.
