Everything You Need to Know About Getting a Loan to Buy a Business
There are many different ways business owners grow their companies. Some develop a new product line, some expand inventory stock, some renovate existing spaces, and some purchase whole new properties to conduct business in.
Another step further is buying an existing business to move the needle for your current business, or to dive right into entrepreneurship with an already up-and-running company.
So, if you’re looking to purchase a business, how do you finance the acquisition? As you can probably guess, not many business acquisitions are cheap. To cover the cost of the business, many take out business loans specifically for acquisitions.
In this guide, we break down exactly how to get a loan to buy a business in three steps:
Step 1: Evaluate your qualifications and understand what lenders are looking for.
When you’re getting a loan to buy a business, the process will be a little different than applying for other types of business financing. Therefore, before you really can get started, it’s important to evaluate your qualifications as a business and understand what lenders are looking for in your loan application.
First and foremost, you’ll want to keep in mind that the business acquisition loan process can be extensive—after all, acquiring another business is a big undertaking that can be risky, if not done right.
Lenders are offering a large amount of money for a big business endeavor, so they’ll spend significant time evaluating your business, your personal management experience, the details of the business you’re buying, and so on.
This being said, let’s take a look at the different business loan requirements lenders will be taking into consideration when you apply for financing to buy a business. As you’ll see below, you’ll not only need to meet traditional loan requirements, but also those that are more specific to acquisitions as well.
Personal Credit Score
When you apply for a business acquisition loan, you might be surprised to learn that your personal credit score is one of the most important factors in determining your loan eligibility.
Especially if you’re looking for a startup loan to acquire a business, lenders see your credit score as a significant factor in your likelihood of making your loan repayments after taking on business acquisition funding.
From the lender’s point of view, they’re lending money to a small business owner, not just the business itself. So as the to-be business owner, how you handle your personal finances is incredibly significant. (Same goes for business acquisition loans and traditional business loans.)
If your credit score is 700 or above, you’re in great shape, and will likely have excellent small business lending options available to meet your business acquisition needs.
Business Credit Score
If you already own a business, your personal credit score is only the beginning of the evaluation lenders will make into your finances as the borrower.
They’ll also review your business credit score and history as one of many important factors in determining your eligibility for a loan to buy a business.
Your business credit score is determined through five main factors:
- Payment history
- Amounts owed
- Length of credit history
- Types of credit used
- Your new credit
Payment history is the most significant of these factors, so it’s critical to always make debt payments on time, both personally and for your business.
Cash Flow (and Ability to Give a Down Payment)
Another important financial indicator that a lender will likely look at when you’re trying to get a loan to buy a business is your cash flow.
The cash flow of your existing business acts as a snapshot of its financial health and an indication of whether your existing business can support the debt and the uncertainty of a business acquisition.
If you exhibit positive cash flow, that’s a sign that you’re managing your business finances well, and a strong profit margin gives you the necessary buffer to make payments on your acquisition alone—even if your newly acquired business isn’t immediately profitable.
Almost all lenders agree that an acquisition is not a realistic way to “save” a business facing cash flow issues or operating at a loss, so don’t expect to be approved for a business acquisition loan if your current business is struggling financially.
Moreover, your cash flow also will give the lender information on your business’s capacity to make a down payment.
Common to commercial real estate loans, getting a small business loan to buy a business also might require a down payment. This could be a one-time payment of anywhere between 10% to 30% of the value of the business you’re buying.
When looking at your cash flow, a lender offering a business purchase loan will want to see that you have enough liquid cash to make a significant down payment and still have enough cash on hand to make your loan payments each month.
Collateral and Balance Sheet
Next, lenders will also care about what collateral you have to offer. Business acquisition loans that require no collateral might be possible, as in most cases, the business you’re purchasing acts as collateral (or, the lender will put a lien on the business you’re purchasing).
On the other hand, however, the lender may require that you put up some other form of personal or business collateral, beyond the assets included in the new business you’re purchasing.
In short, the more collateral you have to offer, the less risky it is for business acquisition lenders to work with you. Therefore, to understand what collateral you have to offer, you may submit an appraisal of your fixed assets. Or, you might simply use your balance sheet to give a lender a sense of your capacity to offer valuable fixed assets as collateral.
All in, the more fixed assets you have on your balance sheet, the easier time you’ll have getting a loan to buy a business.
If you’re looking to purchase an existing business, you should do so with a plan to change operations, pursue a different strategy, or take some measures to improve the existing business’s profitability.
The strategy you take will have a significant impact on the long-term viability of the business, and so on your ability to repay business acquisition loans.
Therefore, along with other pieces of your business loan application, you’ll want to submit a detailed business plan for your new business explaining the history of your business’s current strategy, plans you might have to make changes or add value in the future, and a plan for transitioning to your new strategy.
With this business plan, you’ll want to be sure to include future financial projections—providing some thoroughly researched data-based sales projections for the next two years.
These projections should derive from the business’s historical sales records, while also taking into account your strategy for moving forward. While it’s okay to be confident here, know that your projections won’t be taken at face value, and will need to be backed up with verifiable data.
And even with the data on your side, lenders will downgrade your projections by about 10% as standard practice.
In addition to your business financials and plan, the lender will consider how your work experience as a business owner will contribute to the future of the business post-acquisition.
Are you experienced in the industry of your desired business?
Will you have the tools you need to make your business succeed?
Do you have any specific skills, expertise, or contacts that make the business likely to succeed more because of your involvement?
Conversely, if you have relatively little experience in the industry of your desired business, that could be seen as a red flag to the lender.
The business valuation will be one of the most important qualifications to consider when you’re trying to figure out how to get a loan to buy a business. Of all of the requirements we’ve reviewed thus far, this one will be most unique to business purchase loans.
This being said, generally, to determine a fair price for your business acquisition (and therefore a smart amount for your loan), your lender might ask for a formal business valuation performed by an independent valuation firm.
Through this process, the consultant will look at both tangible and intangible aspects of the business to determine a monetary value under various scenarios.
When analyzing a business, valuation consultants typically account for all expected profits in the foreseeable future, then discount the future profit projected for each year by the rate of return they expect.
However, there are several outside factors that could impact the valuation of your business.
For example, how essential are the current business owner’s expertise or industry contacts to the business’s success?
Considerations like these could impact how valuable the business would be after an acquisition.
As they review your personal experience, business plan, and future projections, along with the business valuation, lenders will also be looking to answer one, fundamental question:
What value do you add to the business that will make it better and more successful than before you acquired it?
That might be a new strategy, a piece of equipment, a customer base, or any number of tangible or intangible contributions.
If you can provide a strong, provable answer to that question, there’s a good chance that lenders will see your business acquisition as a good, fundable deal.
Other Financial Information
Finally, the lender will want to make sure that your business is financially strong, and that the business you’re acquiring is financially strong, too.
You’ll likely have to provide your bank statements, income statements, and business and personal tax returns to prove the revenue (and sources of revenue) for your business. You’ll also have to provide the same information (or as much as you can) for the business you’re buying.
In addition, it’s also likely that you’ll need to provide a current business debt schedule—if you have one, as your outstanding debts can have a serious impact on your ability to qualify for a business acquisition loan.
Typically, your current outstanding debts will take “first position,” meaning that in the event that your business could not repay all its debts, they would be the first ones to get repaid. Most lenders don’t like to approve loans in which they won’t be in the first position, and this is especially true for business acquisition loans.
Because of the relatively risky nature of acquisitions, it’s in your best interest to settle any outstanding debts in order to have any hope of being approved for a new loan.
Step 2: Choose the best business acquisition loan for your needs.
Now that you have a handle on your business’s qualifications and what you’ll need to keep in mind to apply for a business purchase loan, you’ll want to determine which type of small business loan is best for your needs.
When it comes down to it, although there’s no single specific loan type designed for business acquisitions, there are certainly a few financing products that simply fit better for the business acquisitions process than others do.
Therefore, as you’re figuring out how to get a loan to buy a business, you might start by comparing these five top options:
Best Business Acquisition Loans
|Loan Type||Best for:|
Traditional term loans
Highly qualified borrowers looking for lowest interest rates and longest terms
Strong borrowers who can’t qualify for traditional bank loans
Online term loans
Borrowers who can’t qualify for bank or SBA loans; those who need faster funding; startups looking for a loan to buy a business
Affordable, flexible financing option for businesses struggling to get other types of acquisition loans
Borrowers purchasing businesses with valuable equipment; faster funding with more flexible requirements than other options
Traditional Term Loans
If you’re looking for business acquisition loans with a fixed interest rate and predictable monthly payments, a traditional business term loan will fit you well. It’s the easiest to understand because it’s probably what you naturally think of when you think of a business loan.
The terms are pretty simple for this type of business acquisition loan—you borrow a fixed amount of money, usually for a specifically stated business purpose, and pay back the loan over a fixed term and typically at a fixed interest rate.
Term loans are the most common loan type for business acquisition since they fit in well with the typical cost and the long-term nature of purchasing an existing business.
However, bank lenders will have high standards for your business acquisition deal in order to fund your term loan, and you might not qualify on your first try (or at all)—so prepare for one or several lengthy loan applications to secure a term loan for your business acquisition.
If you don’t think you can qualify for a bank term loan, turning to SBA loans will be your next best option for low interest rates and long terms.
Guaranteed by the SBA, these business acquisition loans are slightly easier to qualify for than bank loans, as the SBA’s guarantee means the bank lender takes on less risk when working with you.
The CDC/504 loan program is meant specifically for major fixed asset purchases—which encompasses a business acquisition. It’s a very specific type of financing, and generally a more complicated process that’s harder to qualify for.
SBA 7(a) loans, on the other hand, are the more traditional and common SBA financing option, and one that might be suited for a smaller business acquisition.
In either case, however, these loans will offer long terms (up to 25 years), low interest rates (generally about 6% to 8%), and large loan amounts (up to $5 million).
It’s important to remember though, that although SBA loans are easier to qualify for than bank loans, you’ll still need to meet top requirements. Plus, like bank loans, SBA loans are slow to fund—taking anywhere from a few weeks to a month or more.
Online Term Loans
If you need funding faster, can’t qualify for a bank or SBA loan, or you’re a new entrepreneur looking to buy an existing business, online term loans might be the best option for you.
Online medium-term loans from alternative lenders will be easier to qualify for than bank or SBA loans (and faster to fund), but they’ll still be able to offer the funding you need to buy a business.
Compared to other types of online loans, medium-term loans typically have terms of 12 months or longer, with loan amounts up to $1 million. Although the interest rates with these loans will likely be higher than with a bank or SBA loan, you can still find relatively low rates, especially if you have strong qualifications.
As an example, Funding Circle offers medium-term loans with repayment periods up to five years and interest rates starting at 4.99%. Similarly, Fundation is another notable option—with APRs ranging from 8% to 30% and terms from one to four years. Both Funding Circle and Fundation offer business acquisition loans in amounts up to $500,000.
If you’re a startup looking for a loan to buy a business, your choices will be more limited—however, you may find luck with lenders like CAN Capital or BlueVine who have flexible time in business requirements. This being said, though, these products will typically have higher interest rates and shorter terms.
If you’re having a hard time getting a loan buy a business, another option to consider is seller financing.
Seller financing essentially works as it sounds: instead of getting financing from the bank or another third-party lender, you’re getting a loan from the seller of the business itself.
With seller financing, the seller takes part of the business’s purchase price in cash, and the remainder in the form of a promissory note that you, as the buyer, will pay back with interest over a period of time—typically three to five years.
This being said, however, seller financing is often used in conjunction with traditional commercial lending as the funds don’t usually cover the entire cost of buying a business.
All in all, seller financing is a great option if you can’t qualify for other types of business acquisition loans, especially since rates and terms are typically competitive with other financing products. Of course, for this type of funding to be a viable option, the owner of the business you’re purchasing will have to be willing to offer it.
Finally, in some cases, if the majority of the purchase price for the business you’re acquiring is based on the value of the equipment being transferred, an equipment loan could be a great source of financing for your business acquisition. A small business equipment loan can be used for virtually any equipment need—from computers to production machinery, to vehicles, and more.
As a point of reference, compare equipment financing to a standard car loan: The amount you can borrow depends on the type of equipment, the price, and whether it’s new or used. The lender also considers the expected life of the equipment and its current condition.
Using equipment financing as a business acquisition loan can also be great for accessing funding quickly, with fewer application requirements. With this type of funding, many lenders will look at the value of the equipment first and foremost, and therefore, will offer more flexibility for businesses that don’t necessarily meet traditional requirements.
Step 3: Complete the application process.
As you can see, there are a number of competitive business acquisition loan options available.
Therefore, as you’re figuring out how to get a loan to buy a business, you’ll want to think carefully about which product is right for your needs. To this point, you’ll want to consider factors such as cost, ability to qualify, time to fund, etc. as you compare your options.
Once you’ve determined the right product for your business and where you’d like to apply, you’ll want to gather all of the materials necessary for your application. As you might imagine, some of the requirements will vary based on the product and the lender—in general, however, you can expect to provide some if not all of the following:
- Basic information about your business, as well as the business you’re looking to purchase
- Personal and business bank statements
- Personal and business tax returns
- Financial statements and business debt schedule
- Business plan and relevant experience documents
- Business valuation information
- Collateral or down payment information
- Business licenses, ownership documents, legal contracts or documents
- Business sale contract or letter of intent
Once you’ve gathered all of the required documentation, you’ll be able to fill out, complete, and submit your application.
Underwriting and Closing for Business Acquisition Loans
As you’ve seen thus far in our guide, getting a loan to buy a business is a detailed process.
Therefore, when you submit your application for a business acquisition loan, you’ll want to be sure it’s completed in its entirety. In addition, as you go through the underwriting process, you’ll want to ensure that you respond to the lender’s request for more information or clarifications promptly and accurately—this will increase your chances for approval, as well as speed up the loan timeline.
After you’ve gone through the underwriting process, you’ll (hopefully) receive an offer from one or more lenders. This being said, before you accept any offer, you’ll want to be sure to review the business loan agreement thoroughly, ask any questions you have, and even review it with a business advisor or attorney.
Moreover, if you have multiple offers, you’ll want to compare them to find the most affordable option for your business.
Once you’ve decided which loan is best for your needs, you’ll sign the loan agreement and proceed with the closing process. Depending on the lender and product, you’ll receive the funds in your bank account within a few days.
Frequently Asked Questions
The Bottom Line
At the end of the day, learning how to get a loan to buy a business is often more complex than when applying for other types of financing.
After all, when you’re dealing with a business acquisition, there are more players involved, more details that need to be sorted out, and generally, more risk for both you, as the borrower, and the lender.
Therefore, as you explore your business purchase loan options, you’ll want to take the process one step at a time—ensuring that you have all the information you need and working carefully with the seller, lender, as well as any advisors to your business.