How To Get A Loan To Buy A Business: All You Need To Know

Finding the right loan to buy a business can feel like walking through a maze. The market has many options, and terms and conditions are significantly different.

In this article, you'll find an overview of the most common loans to acquire existing businesses, recommendations for selecting the best according to your goals, and what to expect from the application process.

9 Types of Business Loans

There are different types of business loans: business acquisition loans, small business loans, and microloans to buy materials or equipment.

Additionally, business owners can borrow money from alternative lenders, traditional banks, or microlenders. However, each potential funding source has its pros and cons. Find a brief description of the types of business loans and how you can use them.

1. SBA Loans

SBA loans are partly guaranteed by the Small Business Administration but granted by banks or other lenders. SBA loans are an excellent option if you are looking to fund your business expansion or refinance existing debts.  

SBA loans can also be used as business acquisition loans. The amount lent can reach USD 5 million.

There are several SBA loans, but the most common are 7(a) loans, 504 loans, and microloans. Each category is designed for a specific purpose, so whether you are interested in one of them as a business owner or potential buyer, make sure you apply to the right one. So far, the 7(a) loans are small businesses' primary funding source.

An SBA loan has some of the lowest interest rates and can be paid under long repayment terms.

2. Business Lines of Credit

With a business line of credit, companies can access revolving funding up to a previously established amount. Your payment will depend on how much money you've disposed of, and the financing amount you'll access will depend on how much of your credit you've previously repaid. Think of a business line as a credit card.

Traditional banks and other alternative entities like online lenders can grant these types of loans. The requirements to access one of these financing options are similar to a term loan. Even though they are a more flexible financing option, they can come with draw or maintenance fees.

3. Bank Loans

Traditional banks and loans established businesses. To be eligible, business owners and their companies must have solid financial statements. Some of these products may ask for a down payment beforehand.

Bank loans can be an inexpensive funding source, but the application process might take time. Besides, in most scenarios, traditional bank loans will require collateral or a personal guarantee.

Business owners can use the money banks grant to buy equipment or inject capital into the business.

4. Equipment Loans

Equipment loans are an alternative for businesses wanting to own their equipment or purchase more equipment to grow the business.

Entrepreneurs can use that funding to buy vehicles, office furniture, appliances and more. With this loan, the soon-to-be-purchased equipment can still function as collateral. Still, the interest rates and repayment terms will vary according to your credit history and business financial statements. Lenders may need a down payment before granting the equipment financing. The downside is that the purchased articles may depreciate before you completely liquidate the loan.

5. Personal loans for business

Personal credit can be a good option for entrepreneurs building a new business or for startups. The chances of getting the loan will depend on the individual's credit history. Also, the application process takes less time (compared to other options).

The issue with this type of loan is that the borrowing limits can be lower than business loans since they're for individuals. Besides, the interest rate can be higher, depending on your credit score.

6. Microloans

Microloans are a good option for startups or businesses that need a small amount of money. You can find them at traditional banks, but they're a financial product most commonly offered by online lenders or nonprofits. The available amounts can range between $500 to $50,000.

These loans can be used as a boost for small businesses looking to grow or as an alternative for small business owners who have trouble meeting the requirements of traditional bank loans. The main disadvantage of microloans is that they can be expensive due to higher interest rates.

7. Term Loans

Term loans are a traditional type of loan through which you receive a certain amount you'll have to repay later in a specific number of payments with interest rates included. Payments are usually made once every month and most of the time in a fixed quantity. Traditional banks, or alternative lenders (such as online entities or nonprofits) can grant this financing.

A term loan can be an inexpensive funding source for small business owners. However, qualifying for them can be challenging due to lenders' requirements. Most of the time, banks ask for a specific business number from the company and a good credit score. Alternative lenders might be more flexible with these requirements at the cost of higher interest rates. Additionally, these loans ask for a personal guarantee or collateral.

8. Asset-based loans

Asset-based loans offer an amount based on the value of the company's assets (equipment, inventory, actual state). These assets will also serve as collateral for the borrower. Business owners who need financing for working capital or to invest in a business expansion can apply to traditional banks for this type of funding.

9. Seller financing

Also known as owner financing, seller financing is an alternative type of funding for those looking to buy a business. With seller financing, sellers play the role of a lender and are the ones to fund a portion of the company.

This option allows buyers to access more flexible and convenient financing. At the same time, sellers benefit from it by accelerating the whole acquisition process and making their business more appealing to potential buyers.

How to find the best loan to buy a business?

Now that you have clarity on the types of loans for businesses, here's a list of what to look for when evaluating a potential lender and loan type.

Learn the business costs

Before buying any business, besides the purchase price, it is essential to review how much it costs to maintain and assess what types of future or immediate investments you'll have to make. This section includes inventory, equipment, and any other concept that constantly needs capital.

Know your credit score

Before applying for a loan, you must know your credit score. Your range will be a key factor regarding the type of funding you can access and even under which terms and conditions. Typically, the higher the credit score, the better your chances of accessing a loan with the best conditions.

Understand your debt-to-equity ratio

When a lender or a bank evaluates your funding application, they'll determine how much you rely on debt to finance your business instead of using equity. High ratios can point to unsafe business.

Compare lending options terms and conditions

When evaluating your possible business loan options, review the terms and conditions of each one thoroughly since they can impact both your long-term finances and the business.

Some of the things to consider are:

• Borrowing amount: how much money you need according to your goal, whether buying an existing business, starting one, or growing your own company.
• Annual Percentage Rate: This reflects the total cost of the loan.
• Repayment terms: upfront fees, how much you'll have to pay monthly, for how long, interest rates, upfront fees, and penalties.
• Time to funding: How long does it take to secure the funding from the application process until the money is available

Study the collateral and personal guarantee requirements

Most institutions that offer loans ask for collateral (inventory or equipment) or a personal guarantee (personal assets such as real estate or savings) to mitigate risk. Pay attention to what the institution may seize if you default on a loan.

How to get a loan to buy a business?

Once you choose a loan for your needs and expectations, follow these steps, for the application process and to get the loan to buy a business.

Review your loan eligibility

The cornerstone of a loan application is you. That's why it's essential to review the requirements for the loan you wish to apply for before moving on with the process. If you don't meet the criteria, you'll probably need to step back and work on the missing information.

First, lenders (from traditional banks to online entities) expect to see applicants with a good credit score. Banks would also like to see years of experience in the business. That's why they sometimes aren't as keen on granting large amounts of credit to those with little to no experience in the industry.

If you're looking for a loan to purchase an existing business, you'll likely be asked to make a down payment ranging from 10 to 30% of the asking price.

Gather all your documentation

Lenders will likely ask for documents proving your solvency or ability to repay the loan. Some of the most common documents you'll have to submit to potential lenders are:

• Personal bank statements
• Tax returns from at least the past two years
• Financial statements from your current business
• Debts (including total amounts, payment frequency, payoff date, and more)
• Bank statements from any other business you've managed or owned
• Files about your collateral
• Net worth statement
• Business License

For those who are planning on buying an existing business, they'll also have to include these documents from the company:

• Cash flow statements
• Profits and losses statements
• Balance sheet
• Tax returns from at least the past two years
• Bank account statements
• Income statements

With all this information and documents, you'll also have to submit:

• Business plan, in case you plan to change something from the business
• Letter of Intent, as a way to formally communicate your intention to purchase the existing business
• Cash flow projections for the following up to three to five years
• Professional (and independent) business valuation

Submit your application

In this final step, you should include all your documentation. According to the financial institution to which you're applying, you can submit your application online or physically. The lender may ask you for additional documents that can support your request.

Considerations before you get a loan to buy a business

Identify the business loans you can get

Not all companies are the same. Consequently, not all business loans are right for every venture. According to the needs, financial history, years in business, and more factors, your company might have better chances to access a particular loan.

Identifying the business loans you are eligible for will help narrow your options and reduce the time and effort you invest in the application process.

Consult a financial and legal advisor

A third-party expert is unbiased and can walk you through the application process. At the same time, they can evaluate the financial situation of your business and offer advice on the best option for you.

Advisors can also help you create a financial plan to liquidate the loan in a shorter amount of time, reducing the credit's total cost. Additionally, they can help you have a whole perspective of the loan's implications and understand the fine print.

Ask all the questions to the lenders

By contacting your potential lenders to ask more questions, you can gain more clarity about the terms and conditions, properly assess risks, negotiate terms, and even build trust between you and the lender. However, compare what they say versus the documentation you'll sign.

Settling all of your doubts will help you have realistic expectations about the financial implications the loan has for you and your business and, in the end, help you find the one that is best for you.

If you want to learn more about business loans to purchase an existing business and how to access them, you can access our guide on business acquisition loans.

Get advice to buy a business

If you want to buy an existing profitable business, Boopos can guide you through the process. If you qualify, our advisor can help you every step of the way, from finding a good deal to closing the purchase.

Contact one of our experts and get advice whether you're looking to sell or buy.