Buying a business can be a game-changing move, but financing such a purchase often requires a loan. At Unbroker, we’ve helped countless entrepreneurs navigate this complex process.
This guide will walk you through how to buy a business with a loan, from determining your budget to preparing a winning loan application. We’ll cover everything you need to know to make your business acquisition dreams a reality.
What’s Your Business Acquisition Budget?
Assess Your Financial Landscape
The first step in buying a business with a loan involves a thorough examination of your finances. Collect your bank statements, investment portfolios, and credit reports. This step highlights the importance of a clear understanding of your personal finances before pursuing a business acquisition.
Calculate Your Borrowing Capacity
Determine how much you can realistically borrow. A common guideline suggests a down payment of 20-25% of the purchase price. For instance, if you plan to buy a business valued at $500,000, prepare to have $100,000-$125,000 ready as a down payment.
Your debt-to-income ratio plays a crucial role in this calculation. Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income, with the possibility of exceeding up to 45% if the borrower meets certain credit score criteria. To find your ratio, divide your monthly debt payments by your monthly income. If your ratio exceeds this threshold, consider paying off some existing debts before applying for a business acquisition loan.
Consider Additional Costs
The purchase price is not the only expense you’ll face. Factor in these additional costs:
Many aspiring business owners underestimate these additional costs. Platforms like Unbroker offer transparent pricing options (starting from as low as $99/month for their Assisted Business Sale service), which can help you allocate more of your budget to the actual business acquisition.
Plan for Contingencies
Always include a buffer in your budget for unexpected expenses. This could be an additional 10-15% of your total budget. This extra cushion can provide peace of mind and financial flexibility during the acquisition process.
As you move forward with your budget planning, the next step involves exploring various business loan options. Each option comes with its own set of advantages and requirements, which we’ll discuss in detail in the following section.
Where to Find Business Acquisition Loans
SBA Loans: The Gold Standard
SBA loans, particularly the 7(a) program, stand out as a top choice for business acquisitions. These loans offer competitive interest rates and extended repayment terms. The SBA guarantees up to 85% of loans up to $150,000 and 75% of loans exceeding $150,000, which reduces the risk for lenders.
However, SBA loans come with strict requirements. You need a credit score of at least 680, and the business you plan to acquire must show profitability for the past two years. The application process takes time (60-90 days), but the favorable terms often justify the wait.
Conventional Bank Loans: For Strong Borrowers
Conventional bank loans typically offer the lowest interest rates, while business owners may find it easier to qualify for SBA loans. These loans usually require more collateral.
Banks usually expect a down payment of 20-30% of the purchase price. They scrutinize both your personal finances and the business’s financials. Approval times range from 30 to 60 days (which is faster than SBA loans).
Seller Financing: Flexibility and Speed
Seller financing increases the pool of potential buyers and allows the seller and buyer to be more creative with deal terms than a bank would. This option attracts buyers when the seller wants to exit quickly.
Typically, sellers finance 30-60% of the purchase price. Interest rates often exceed bank loans, ranging from 6-10%. The repayment term usually spans 5-7 years (shorter than traditional loans).
Alternative Lending: Quick Cash with a Cost
Online lenders and alternative financing companies offer faster approval times and more lenient requirements. However, this convenience comes at a price – interest rates can soar, sometimes reaching 30% or more.
These lenders focus more on the business’s cash flow than your personal credit score. They provide a good option if you need funding quickly or don’t qualify for traditional loans.
Choosing the Right Loan for Your Acquisition
Each financing method has its strengths and weaknesses. The key lies in matching the loan type with your financial situation and the specifics of the business you plan to acquire. Consider factors such as interest rates, repayment terms, and approval timelines when making your decision.
Now that you understand your loan options, the next step involves preparing a winning loan application. This process requires thorough preparation and attention to detail, which we’ll explore in the following section.
How to Craft a Winning Loan Application
Compile Your Financial Dossier
Start by gathering a comprehensive set of financial documents. Lenders typically require:
- Personal and business tax returns for the past three years
- Personal financial statement
- Year-to-date profit and loss statement
- Balance sheet
- Cash flow projections for the next 12 months
The Federal Reserve’s 2022 Small Business Credit Survey reports that application rates for financing declined, and approvals remained little changed. A complete financial package significantly increases your approval chances.
Create a Compelling Business Plan
Your business plan serves as your roadmap to success. Include:
- Executive summary
- Company description
- Market analysis
- Organization and management structure
- Service or product line
- Marketing and sales strategies
- Financial projections
The U.S. Small Business Administration emphasizes that a business plan is a way to think through the key elements of your business. Your plan should clearly outline how you’ll use the loan funds and how you expect the business to perform under your leadership.
Highlight Your Industry Expertise
Lenders want to see that you have the know-how to run the business successfully. Emphasize your relevant experience, skills, and achievements. If you’re entering a new industry, consider partnering with someone who has experience in that field.
According to the National Federation of Independent Business, 43% of all small business owners reported job openings they could not fill. If you lack direct experience, focus on transferable skills and your plan to quickly get up to speed.
Present Your Growth Strategy
Outline a clear plan for how you’ll manage and grow the acquired business. This could include:
- Cost-cutting measures
- Revenue growth strategies
- Plans for expanding into new markets
- Potential for introducing new products or services
Be specific and realistic. If you plan to increase revenue by 20% in the first year, explain exactly how you’ll achieve this goal.
Choose the Right Lender
Select a lender that aligns with your needs and business goals. Traditional banks often offer lower interest rates but have stricter requirements. Online lenders (like Kabbage or OnDeck) might provide faster approval times but at higher interest rates. For a transparent, low-cost option with expert support, consider platforms like Unbroker, which offers services starting at $99/month for assisted business sales.
Your application should instill confidence that you’re the right person to take this business to new heights. With a well-prepared application, you move one step closer to securing the funding you need to make your business acquisition a reality.
Final Thoughts
Buying a business with a loan requires careful planning and execution. Your financial assessment sets the foundation for your acquisition journey, helping you understand your borrowing capacity and prepare for additional costs. Exploring various loan options allows you to find the best fit for your situation, whether it’s an SBA loan, conventional bank loan, seller financing, or alternative lending.
A comprehensive financial dossier, compelling business plan, and clear growth strategy can significantly boost your chances of loan approval. Highlighting your industry expertise and management skills shows lenders you can run the business successfully. Seeking professional advice provides valuable insights and helps you navigate complex financial decisions.
Unbroker offers transparent, low-cost options for business transactions, with services starting at $99/month for assisted business sales. Our platform combines efficiency with expert support, helping you navigate the complexities of buying a business with a loan. The journey may challenge you, but it can lead to exciting new opportunities and success in the business world.
