How To Get A Loan To Buy A Business

Buying an existing business has several advantages over starting one from scratch, which can include — in addition to faster profits and lower risk — access to funding. Business acquisition loans differ from startup loans because there’s a financial history to review during the underwriting process, according to Joseph Camberato, CEO of National Business Capital. “They’re also different from traditional business loans because eligibility hedges not only on the borrower’s qualifications, but also on how the target business performs financially,” he says.

While accessing capital to purchase a business is different than other types of loans, there are some similarities in how you should approach applying for a business acquisition loan. Here are the steps to make sure you get the best chances of approval.

1. Assess your qualifications

Eligibility requirements can vary significantly based on the lender you choose. However, there are a few general factors that will influence your eligibility with almost any lender.

Business experience

Experience running a business is an important consideration for a lender when evaluating an application for a business acquisition loan. The success of the business, and therefore the business loan, is dependent on how it’s managed, and lenders want to know that you have the knowledge to keep things up and running.

Personal financial information

A lender will look at several aspects of your personal financial history to determine if you are eligible for a loan to buy a business. This can include your liquidity — or your personal cash flow —, your overall net worth and your personal credit history.

You’ll likely need a relatively clean personal credit history and a good or excellent credit score — a FICO score of 670 or above. Some lenders may approve loans for borrowers with lower credit scores, but you may encounter higher rates and fees or be required to secure the loan with collateral.

Business information

A lender will also want to know everything they can about the business you are purchasing, including historical financial performance and how the acquisition deal is structured.

2. Gather the information you’ll need to apply

You’ll need several pieces of information to apply for a small busines loan.

Information about the business you want to purchase

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.

Your business history

A lender will generally want to know about your history as a business owner, including how many businesses you’ve owned, how long you’ve been a small-business owner and the success of those other businesses. They may look at your business credit history to get an understanding of your payment habits.

Personal documents

In addition to asking for information about your other business ventures, you should be prepared to provide some personal documents for your lender, which can include things like your social security number, recent tax returns and bank statements and information on personal assets if they are going to be used to secure the loan.

Business documents

Along with personal documents, your lender will want to see various documents related to the business you are planning to purchase. These may include:

• A business plan that outlines your operational plans and use of funds.
• Employer identification number.
• Recent tax returns from the business being purchased.
• Business financials, including the most recent balance sheet and profit and loss statement from the business being purchased.
• 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 .

3. Find a lender

Once you’ve determined your eligibility and how much you need, you can begin your search for the right lender. When considering lenders to help you purchase a business, consider factors like speed of funding, interest rates and fees, length of repayment terms and qualification requirements.

Banks and credit unions

Traditional lenders like banks and credit unions often have stringent requirements, but can offer more favorable terms like lower interest rates and longer repayment terms. To qualify for a loan to buy a business with a bank, you’ll likely need strong personal credit, a solid history of business ownership and strong personal assets to back the loan.

Online lenders

Alternative lenders like online business lenders typically have more flexible requirements for business acquisition loans, especially when it comes to personal credit and length of time in business. They can also fund faster than traditional lenders, allowing you to make a fast competitive offer if you are competing against other buyers.

Online lenders offer some of the highest interest rates and fees, however, and it may be difficult to find ideal repayment terms with an online loan.

SBA lenders

If you can afford to wait, SBA loans can be used to purchase existing businesses, and can offer more lenient qualification requirements than some banks, while preserving the low interest rates and fees. Although they offer competitive interest rates and long terms, SBA loans can take up to several months to fund, so they’re not a good fast financing option.

Alternative financing options lenders

If traditional or online loans aren’t right for you, there are alternative ways to finance the purchase of a business.

• 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.
• Personal savings. 55 percent of businesses surveyed in the Findings from the 2024 Small-Business Credit Survey used personal savings to fund a business, according to the Federal Reserve. If you can afford to purchase a profitable business out of your own pocket, you can save thousands in interest down the road and pocket any profits that come your way. You are at risk of losing your personal savings, however, if the business goes under.
• Venture capital (VC) funding. Venture capital offers a form of equity financing for your business whereby you exchange pieces of business ownership for funding. This type of financing allows you to avoid taking on business debt and paying interest; however, diluting your ownership means you may have to answer to your investors before making decisions about your company.

4. Apply for the loan

Once you’ve done your research and gathered your documents, you can submit your application to your lender. Application processes may look different for different lenders, but there are some general steps you should follow:

• Make sure you send in all the required documents. Though we’ve given a list of general documents you’ll need to provide, your specific lender may ask for additional information. Make sure you’ve checked off every item on your lender’s list before you submit your application to limit back and forth.
• Double check your application. In addition to checking off your required documents, double check how you are speaking about yourself and your experience in your business application. If you can, ask a trusted mentor or reference to glance over your application as well.
• Get an understanding of the timeline of the process. Don’t be afraid to ask your lender for a typical timeline of the underwriting process, and communicate any time restrictions you have. Knowing what to expect ahead of time can limit headaches on both ends, and help you plan for your purchase as well.
• Consider back up plans. After you’ve submitted your application, consider backup plans — like personal funds or equity financing — if you are denied, or only partially approved. This can include communicating with the seller about other options, like seller financing.

Bottom line

A loan to buy a business may be easier to qualify for than a startup loan; however, the steps to get a business acquisition loan are generally the same as any other business loan. Prepare to show your history as a business owner and answer questions about the finances of the business that you’re planning to acquire. Also make sure you do your due diligence to find the best lender for you.

Frequently asked questions

• How difficult is it to get a loan to purchase 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.

• Can I get a loan to buy a business with no money down?
  

  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.

• Do banks give loans to buy a business?
  

  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.

• Can I get a business loan with bad credit?
  

  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.