Key takeaways
- Financing an established business is often easier than starting a new venture
- You can purchase a business using a term loan or SBA loan
- Personal funds, seller financing, and private equity or venture capital are alternative ways to purchase a business
Starting a business from scratch is a massive undertaking. Some entrepreneurs skip it entirely by buying an existing business, expanding their operations, or absorbing competitors. Doing this has advantages, including the perks of buying into an already established operation.
Getting financing for this type of purchase is easier than you might imagine. In fact, getting financing for buying an existing business is often easier than getting it for starting a new operation. If you have a proven track record as a business owner, you should be able to show lenders that you are creditworthy and a safe investment.
How to get a loan to buy a business
Whether you currently own a business or this will be your first rodeo, the lender will want to know more about the company you’re hoping to acquire. You’ll also need the following to convince lenders you’re worthy of funding:
Credit
You should have a relatively clean personal credit history and a good or excellent credit score. A few blemishes on your credit report or a lower credit score don’t mean you’ll automatically be denied a loan. Still, if approved, the borrowing costs will likely be higher.
Other businesses owned
If you own other companies, the lender will likely view your business credit history and score to determine if it’s positive. Your business credit history should be free of late payments, foreclosures, liens and bankruptcies to get approved for a loan.
The lender wants reassurance you’re entering an industry you know. So, you should have proof of work experience or extensive training in the field before applying.
Information about the business you want to buy
The lender will want to know more about the company you’re hoping to acquire. Lenders will likely ask questions like:
- What is the business worth?
- Is the sale asking price reasonable?
- Is the company operating profitably?
- How much debt is owed to creditors?
- Are there any delinquent accounts?
You’ll need to answer these questions during the loan application process, and the current owner should be able to provide this information.
Preparing to apply for a business acquisition loan
Before researching lenders and formally applying for financing, you’ll also need to gather specific documentation.
Personal information and documents the lender will request include:
- Your name and Social Security number
- Recent tax returns and bank statements
- A business plan that outlines your operational plans and funding needs
- A letter of intent detailing the terms and conditions of the proposed acquisition
- Financials for other companies you own (if applicable)
It’s also helpful to have these business documents handy:
- Requested loan amount and purpose
- Employer identification number
- Recent tax returns
- Business financials, including the most recent balance sheet and profit and loss statement
- Three to five years of projected financials
- Asking price for the business and an itemized list of what’s included in the sale
- Proposed bill of sale, or the legal document that will be used to transfer ownership of the company
Be mindful that this list is not exhaustive. Some lenders may request additional documents or information not listed here, so it’s worth inquiring before you apply to avoid hiccups in processing your loan application.
Types of financing to buy a business
Several types of funding are available to buy a business. Here are a few to consider:
Term loans
Business term loans are available through most financial institutions and online lenders. You’ll typically need to meet the lender’s requirements for credit score, minimum time in business and annual revenue.
Traditional lenders
Traditional banks and credit unions often have stringent requirements but offer more favorable terms, including lower interest rates. Getting approved by a traditional lender can sometimes be more difficult if you do not have substantial assets and solid credit.
Online lenders
You may find more flexibility with online lenders offering business loans. Alternative lenders often offer more lending options than traditional lenders as they cater to a variety of borrowers. Alternative lenders often have flexible requirements and provide bad credit business loans. The flexibility can come at a cost, though, as you may be subject to a higher interest rate. Additionally, online lenders generally offer faster funding times, a significant upside if you want to purchase immediately.
SBA loans
Backed by the U.S. Small Business Administration, SBA loans are worth considering. They’re offered through banks, credit unions and online lenders approved by the SBA to administer loans and come with competitive loan terms.
To qualify, you don’t need perfect credit — a FICO credit score of at least 670 may suffice with some lenders. However, a higher score means you’ll qualify for more favorable loan terms. But SBA loans have a significant downside as the funding timelines are notoriously lengthy. You could be better off exploring other options if you’re looking to buy a business in the next month or two.
Seller financing
This solution involves a financing arrangement between the seller of the business and you, the buyer. The written agreement should include the purchase price, interest rate, loan term, payment amount, due date, fee schedule and other information applicable to the business’s sale.
This funding method may be best if the seller offers exceptional financing terms. Still, you’ll likely need to prove you’re a creditworthy borrower to seal the deal.
Private equity or venture capital
Unlike other types of small business loans, private equity and venture capital support business acquisitions without repayment, giving investors ownership and potentially active involvement in business operations. Before investing in a business, most investors will want to evaluate financial documents and information about the business an owner wants to acquire before moving forward.
Bankrate insight
Many business owners often choose to use their personal savings to avoid debt financing.
According to data from the 2022 Small Business Credit Survey by the Federal Reserve Banks, 53 percent of employer firms use personal funds in response to financial challenges. The same survey found that 66 percent of surveyed small businesses used personal funds or funds from loved ones as a form of financing within the past five years.
Applying for a business acquisition loan
When you’re ready to apply for a loan to buy a business, follow these steps to help make the process more seamless:
1. Determine if you’re eligible for funding. Eligibility guidelines vary by lender. But as mentioned above, most have a credit score, time in business and annual revenue requirement. Research lenders to find those with loan products you may qualify for.
2. Select the right loan product. After scoping out lenders, compare terms and fees. The one offering the lowest interest rate may not be the best choice if it charges high origination fees. And don’t forget to consider online lenders if you need a loan solution with more flexible eligibility guidelines or faster funding times.
3. Gather your personal and business documents. Reach out to the lender to find out if there are documents you’ll need to provide when you apply that aren’t mentioned in the list above.
4. Apply for a loan. Complete all components of the application and review for accuracy before submitting. Omissions or errors could result in a denial.
If approved, review the loan agreement and disclosures before signing on the dotted line to ensure you’re fully aware of the terms of conditions. Doing so also helps avoid surprises once you’ve entered into a legally binding agreement and the funds are disbursed.
Bankrate insight
While comparing lenders, consider using a business loan calculator to be sure you find the right repayment terms for your business needs.
The bottom line
Securing a loan to buy an existing business is often easier than getting financing for starting a new business. Prepare to show your history as a business owner and answer questions about the finances of the business that you’re planning to acquire. Find the right lender to fit your needs and terms that work for you, and you should be able to move forward with your purchase.
Frequently asked questions about loans to buy a business
It depends on the lender’s guidelines. The process should be straightforward if you meet the requirements and provide the requested documentation. But securing funding may be difficult if you have past credit issues, minimal industry experience, or the lender has concerns about the financial health of the company you plan to acquire.
Several business loan options do not always require a down payment, including term loans, lines of credit and microloans. You can keep your hard-earned money in your pocket when accessing funding, but this perk comes at a cost, typically in the form of steeper borrowing costs and fees.
Traditional banks, credit unions and online lenders extend loans to buy a business. The best lender for you depends on their offerings and eligibility criteria. You’ll usually find that banks and credit unions are less flexible with lending guidelines than online lenders, but online lenders may assess higher interest rates.
Yes, getting a small business loan with a lower credit score is possible if you meet the lender’s revenue and time in business requirements. However, your options will be limited, and you can expect high interest rates. Some lenders may also only extend secured loan offers to risky borrowers.
