How to Apply for a Loan to Buy an Existing Business
Looking to buy an existing business? You have come to the right place for some of the most informative content around this business practice. In fact, between 90-95% of entrepreneurs that buy existing businesses are still up and running 5 years later!
Before you can purchase your dream business, you’ll first need to apply for a loan to finance the purchase. When it comes to financing, your options are diverse, but the two most common routes are to get an owner-occupied or non-owner-occupied loan, also known as hard money and soft money loans respectively.
In this piece, you’ll get the rundown on a few key elements, which include:
- Understanding your financing options
- how to prepare for a business loan application
- Considerations of lenders
- Finding the right lender for your goals
- Additional finance options
Keep reading to find out more about how you can be successful in this process!
Understand Your Financing Options
While 78% of startups use their own funding to launch their business when you are buying an existing business, you have more financing options. These options include buying the business outright or applying for a loan. There are pros and cons to both options, but you must understand what each entails before deciding which one is best for your financial situation.
In general, the most popular financing option is applying for a loan because it can be more cost-effective in some situations. Your long-term goals, present cash flow, and credit rating will impact your current financial picture. If you’re able to buy an existing business with cash, it’s much simpler than trying to secure financing. However, if you do get a loan, you have more flexibility with how much you borrow and what terms are offered—but it may not leave as large of a profit margin as putting down all cash upfront.
Just remember that if you opt for financing instead of paying cash up front, you’ll need time after closing on your deal to acquire the necessary funds before making any major investments in your new business venture. These solid fundamentals are non-negotiable to succeed when you buy an existing business.
How to Prepare Personal Finances for a Loan Application to Buy an Existing Business
It’s never too soon to start getting your personal finances in order. To buy an existing business you will need clear pictures of your finances and your goals for the purchase. A vital piece of this process is to establish those financial objectives in writing.
Write your objectives down and watch how this process improves your odds of achieving them. Set those financial objectives in very specific terms. We all want to make “a ton of money” but no one knows how much “a ton” is until they get specific.
Dig into the ways your current cash flow makes those objectives possible and the terms that financial condition brings. Having a deadline for your first 60-90-120 days in the business can help you to be successful.
Additionally, calculate what kind of down payment you can afford, and crunch the numbers on different financing options. Genuinely get the rundown by researching to consider how much time and money you will be investing to run the business profitably and effectively.
Take time to review credit reports with banks and other financial institutions before applying for financing since those are likely to be a part of the equation. Are your personal finances tight at present, and you may have only saved up $50,000 over several years as a down payment? Have an accurate sense of these things BEFORE applying.
The ideal borrower will have a clear and thorough answer to one tremendous question lenders have: “Why should we lend you money?”
What Lenders Consider When Applying for a Business Loan
It can be hard to find the right loan, so we’re here to help. When you buy an existing business, knowing what lenders are looking for can give you an edge when securing financing. Financial history hurts 90% of prospective business buyers.
Your credit history will be a part of any lender’s consideration for a loan to buy an existing business. In fact, one of the main causes of loan applications for small businesses being rejected is poor credit history. Additionally, having a bad credit history can affect insurance costs and how appealing your company is to potential customers, suppliers, and vendors.
Lenders will want to know the type of property you’re buying. This information gives them a sense of the future requirements you may have to operate your company. A lender may get a sense of the established customer base, defined operating expenses, and employee pool available with a property type in mind.
And finally, your projected cash flow matters. Lenders will need to know you can responsibly handle the money. Most lenders will require you to submit detailed information about your personal finances before even considering whether or not they’re willing to make a loan.
Buying an Existing Business means finding the Right Lender
If you are looking to buy an existing business, there are many financing options available. One of the most popular ways is using a small business loan. These loans are available at numerous banks and financial institutions and can be used to purchase any type of business. Some requirements that have been set by the Small Business Administration (SBA) include the following:
- At least 51% of the business must be under the ownership of a U.S. citizen
- Be in business for-profit
- Engage in business in the United States or its territories
- Possess sufficient owner equity to invest
- Before requesting financial aid, explore other financial options, including your own assets
The SBA provides these requirements to approve your small business loan request. If you meet these qualifications, then you may proceed with your application process for buying an existing business.
The right lender for you will have financial tools that fit your credit rating, financial outlook, and of course your business goals. After gathering the required documents, have a conversation with a finance professional to be sure your needs are met by the financing options available to you.
Additional Options for Business Purchase Financing
For some entrepreneurs, the best way to get started with buying an existing business is with additional sources. You don’t have to apply for a loan to pay for a business acquisition.
Consider alternate funding options along your search for an accommodating lender. Seller financing may be one such option. This loan given to the buyer by the seller of a home or business is known as seller financing and carries many benefits.
In addition to the greater availability of financing options even for buyers with modest incomes, seller financing can present lower closing-cost charges. The increase in agreement flexibility offers a path forward to business owners who might otherwise be priced out.
Borrowing from family and friends is also a timeless option to fund buying an existing business. The emotional cost of defaulting on your loved ones is enormous, so you should not take this decision lightly. However, this might be a viable finance option if you’re confident in your capacity to repay and are prepared to draft an unbreakable loan agreement.
Find partners or investors to buy an existing business. You can split the investment and the ownership stake in your company. Just be aware that doing so will have an impact on your company’s operations, organizational structure, and profit-sharing policy.
Finally, put more of your own money to work. You may want to think about using investments and other cash sources in addition to your usual savings to aid in financing your new company. Just remember that even the best business opportunities come with some risk.
Conclusion
When buying an existing business through any financing be mindful of tax repercussions and the possibility of draining your emergency fund or nest egg.
Try a combination of some options we discussed in this piece if want to buy a business with little up-front cash—a strategy known as a leveraged buyout.
Having a relationship with a bank that knows your goals and has the tools to help is crucial. Small Business Bank is transforming the way entrepreneurs establish their wealth-building methods. Create the cash flow paths you need today!
