Buying an established business can be a smart move, but financing the purchase often presents a challenge. At Unbroker, we’ve helped numerous entrepreneurs navigate the complex process of securing loans for business acquisitions.
In this guide, we’ll walk you through how to get a loan to buy an established business, covering everything from understanding loan types to preparing a stellar application. We’ll also explore alternative financing options to ensure you have all the information you need to make the best decision for your future venture.
What Loans Can You Get to Buy a Business?
When you plan to finance the purchase of an established business, several loan options exist. The right financing can significantly impact the success of a business acquisition deal.
Traditional Bank Loans
Traditional bank loans often serve as the first choice for many buyers. These loans typically offer lower interest rates compared to other options. However, they also come with stricter requirements. Banks usually require:
- A strong credit score
- Substantial collateral
- A solid business plan
- Scrutiny of the financials of the business you plan to buy
SBA Loans
Small Business Administration (SBA) loans provide another popular option. The government partially guarantees these loans, which reduces the risk for lenders. As a result, they often feature more favorable terms than traditional bank loans. The SBA 7(a) loan program suits business acquisitions particularly well, with loan amounts up to $5 million.
Online Lenders
Online lenders have gained popularity in recent years. They often boast a faster application process and more flexible requirements than traditional banks. However, this convenience usually results in higher interest rates. Some online lenders may approve loans with credit scores as low as 600, but interest rates can significantly exceed those of bank loans.
Factors Lenders Consider
Regardless of the loan type, lenders evaluate several key factors when deciding whether to approve your loan:
- Credit History
- Cash Flow
- Capital
- Market Conditions
Weighing Your Options
Each loan type presents its own advantages and disadvantages:
- Traditional bank loans offer the best rates but prove hardest to qualify for
- SBA loans provide a good middle ground, with reasonable rates and slightly easier qualification
- Online lenders offer the fastest and most accessible option, but at a higher cost
The loan you choose will affect your business’s financial health for years to come, so you must make an informed decision. Consider your situation carefully and select the option that best fits your needs and qualifications.
As you explore these loan options, you’ll need to prepare a strong loan application. Let’s examine the key components of a successful application in the next section.
How to Prepare a Winning Loan Application
Gather Your Financial Documents
Lenders require a clear financial picture of you and the business you plan to buy. Collect these essential documents:
- Personal tax returns (last 3 years)
- Personal financial statement
- Business tax returns (last 3 years)
- Year-to-date financial statements
- Projected financial statements (2-3 years)
- Current balance sheet
- Profit and loss statements
A study found that 82% of the time, poor cash flow management or poor understanding of cash flow contributed to the failure of a small business. Lenders scrutinize these documents to ensure you can manage the business’s finances effectively.
Craft a Comprehensive Business Plan
Your business plan serves as your roadmap to success. Include these key elements:
- Executive summary
- Company description
- Market analysis
- Organization and management structure
- Service or product line
- Marketing and sales strategies
- Financial projections
A study found that businesses with a plan grew faster and were more successful than those without one. Your plan should showcase a clear understanding of the business you’re buying and your growth strategies.
Calculate Your Loan Amount
Determine how much to borrow by considering these factors:
- Purchase price of the business
- Working capital needs
- Potential renovation or equipment costs
- Loan fees and closing costs
A recent report indicates that the average rate paid for short maturity loans was 8.8% (down 0.6 (60 basis points)) and 24% of small business owners report borrowing on a regular basis. However, your specific needs may vary widely depending on the business size and industry.
Prepare for Due Diligence
Lenders conduct thorough due diligence on the business you’re buying. Be ready with:
- Business licenses and permits
- Contracts with vendors and customers
- Lease agreements
- Inventory lists
- Employee information
A survey by the International Business Brokers Association found that 39% of business sales fell through due to issues discovered during due diligence. Try to anticipate potential problems and address them proactively in your application.
With a well-prepared loan application in hand, you’ll increase your chances of securing financing. However, traditional loans aren’t the only option available. Let’s explore some alternative financing methods that might suit your needs better.
Exploring Alternative Business Financing Options
Seller Financing: A Mutually Beneficial Solution
Seller financing presents an excellent option for both buyers and sellers. In this arrangement, the seller acts as the lender, allowing you to pay for the business over time.
A study by Pepperdine University found that for deals valued at more than $5 million, the most common buyers were existing companies looking to grow through acquisition (40 percent). This method often offers more flexible terms than traditional loans and can indicate the seller’s confidence in the business’s future success.
To pursue seller financing:
- Negotiate terms directly with the seller
- Expect to pay a down payment (typically 10-30% of the purchase price)
- Prepare for higher interest rates than bank loans (usually 6-10%)
Sellers often show more willingness to offer financing in a buyer’s market or when they’re eager to retire.
SBA Loans: Government-Backed Financing
SBA loans merit a closer look as an alternative financing option. The SBA doesn’t lend money directly but guarantees loans made by participating lenders, which reduces their risk.
The SBA 7(a) loan program suits business acquisitions particularly well. The primary purpose of this program is to examine historical trends and uncover performance insights for businesses seeking financing.
Key features include:
- Loan amounts up to $5 million
- Repayment terms up to 25 years
- Interest rates typically 2.25-4.75% above prime
These numbers demonstrate the program’s popularity and accessibility.
Crowdfunding and Angel Investors: Leveraging Networks
For those open to relinquishing some equity, crowdfunding and angel investors offer intriguing possibilities.
Crowdfunding platforms like CircleUp focus specifically on established consumer brands. Recent research has explored how entrepreneurs can now “crowdfund,” or sell securities to unaccredited investors over the Internet, to raise capital.
Angel investors (typically affluent individuals looking to invest in promising businesses) can provide another viable option.
When you pursue these options:
- Prepare a compelling pitch deck
- Ready yourself to give up some control in exchange for funding
- Use your network to find potential investors
These alternative financing options can serve as powerful tools, but each comes with its own set of challenges and considerations. You must carefully evaluate your options and choose the one that best aligns with your goals and circumstances.
Final Thoughts
Securing a loan to buy an established business requires careful planning and preparation. We’ve explored various financing options, from traditional bank loans to alternative methods like seller financing and crowdfunding. Each option has its own set of advantages and challenges, so you must choose the one that aligns best with your financial situation and business goals.
To increase your chances of loan approval, you should build a strong credit history, gather comprehensive financial documents, and craft a solid business plan. Lenders want to see that you’ve done your homework and understand the business you plan to purchase. You should also consider working with professionals who can guide you through the complexities of financing and acquisition.
At Unbroker, we specialize in helping entrepreneurs navigate the business buying journey. We offer transparent, low-cost options for both buyers and sellers. Once you’ve secured financing, you’ll need to finalize the purchase agreement, conduct due diligence, and plan for a smooth transition of ownership. Take the time to understand the business operations and develop a strategy for future growth.
