How to Get a Loan to Buy a Business in 3 Steps

Find a loan to buy a business here.
Editor's note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

How to Get a Loan to Buy a Business: Everything You Need to Know

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: Know What Lenders Are Looking For

The absolute first step in getting a loan to buy a business is to know what you qualify for, and what lenders are looking for in your loan application.

And when you’re wondering how to get a loan to buy a business, you should know that the process of applying and qualifying for financing to purchase an existing business can be intensive.

That’s because 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 time checking out your business, your personal management experience, the details of the business you’re buying, and so on.

What’s the complete list of every piece of information you might need to provide on an application for a loan to buy a business?

Here’s what the lenders are looking at when buying a business is your loan purpose.

Your Business and Personal Credit Score

Wondering how to get a loan to buy a business?

You should know where your personal and your business credit scores stand, first.

Your personal credit score shows how trustworthy you’ve been with your personal debts in the past, and your business credit score shows how trustworthy your business has been with its debts in the past.

Both financial indications will be very important in the lender’s decision of whether or not to lend to you. They are forking over a lot of cash for your business acquisition, after all, and they need to be confident that you’ll pay them back.

If your personal credit score is below a 650, you might have a hard time qualifying for the different business purchase loans out there.

Your Cash Flow (and Ability to Give a Down Payment)

Another important financial indicator that a lender will likely look at is your cash flow.

Your cash flow is the total amount of money being transferred into and out of a business. Technically, it’s a look into your increasing (or decreasing) liquid cash assets.

Looking at a business’s cash flow is one of the best ways to get a sense of a business’s financial health. Essentially, businesses need cash on hand to cover their expenses, and not having that cash can be dangerous.

But a lender offering a loan to buy a business would look at a business’s cash assets to see what capacity the business has 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.

Having enough cash on hand to comfortably make a down payment is a good thing. Lenders will want to see that you have some skin in the game, and you might secure lower rates with a higher down payment.

When looking at your cash flow, a lender offering an acquisition 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 when each month rolls around. They certainly wouldn’t approve your loan if the down payment required was more than your average cash flow for a month.

Your Collateral and Balance Sheet

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). But they might require that you put up some other form of personal or business collateral, beyond the assets included in the new business you’re purchasing.

Your ability to offer real estate, equipment, machinery, or a savings account as collateral against the value of your loan increases your chances of being able to qualify for that loan.

Why?

Well, the more collateral you have to offer, the less risky it is for business acquisition lenders to work with you. That’s because these valuable assets protect the lender in the case you default. They can just seize your collateral to recoup their losses.

To understand what collateral you have to offer, you could just submit an appraisal of your fixed assets. But lenders might also get a sense of your capacity to offer valuable fixed assets on your balance sheet.

All in, the more fixed assets you have on your balance sheet, the easier time you’ll have getting a small business loan to buy a business.

Your Business Plan

Buying an existing business is a major growth point for your company.

And lenders will want to see that it’s something you’ve thought out in regards to the trajectory of your business.

Having a business plan in which this acquisition makes sense for you is a must-have for the buying a business loan application.

A detailed business plan should include how you’ll incorporate the new business into the structure and model of your existing one, and how you’ll ultimately plan on building the revenue of the business you’re acquiring.

Your Related Experience

Beyond just the cost of the business acquisition you’re getting a loan for, the lender might want to see how your previous experience as a business owner and manager will contribute to the success of the business post-acquisition.

Are you acquiring another business in an industry you’ve operated in before? Do you have any specific skills, expertise, or connections that make the business likely to succeed more post-acquisition because of your involvement?

On the other hand, if you have little to no experience in the space that you’re buying a business, a lender might not trust that you’ll manage it to success.

The Business Valuation

Of course, the financials of your current business matter.

But just as important are the financials and value of the business you’re purchasing. A lender wouldn’t want to finance the acquisition of a business that’s doomed to fail, after all.

A lender might want to see a formal valuation of the business you’re purchasing to fully understand all its fixed and liquid assets, debt obligations, and so on.

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 overall valuation of your business.

For example, how essential are the current business owner’s expertise or industry contacts to the business’s success? Would the business lose value if its current owner left the operation?

Considerations like these could impact how valuable the business would be after an acquisition.

Value Add

When you submit an application, lenders start looking at your business experience, your business plan, your industry, and so on to answer the following question:

What value does acquiring this new business add to your existing one, and vice versa, what value do you add to the new business to make it more successful than it was before you purchased it?

You might be able to add value to the new business (and your business as a whole) with your current customer base, a new product, a new strategy, and so on.

Other Financial Information

The lender will want to make sure that your business is financially strong, and the business you’re acquiring is financially strong, too.

You’ll like 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.

See What I Qualify For

Step 2: Know Your Business Purchase Loan Options

Next on your how to get a loan to buy a business guide—knowing what business purchase loans are even out there.

Banks have always been the traditional lenders offering a loans to buy a business. However, like all other bank loans, getting a loan to buy a business from a bank is very challenging.

So when a bank loan for buying a business isn’t in the cards for you, here’s a list of your top options for getting a loan to buy a business.

SBA Loans

The best place to start your search for loans to buy a business is the Small Business Administration.

SBA loans are technically loans issued by banks, but guaranteed the SBA. This means that, as the business owner, you’re getting a long-term, low-rate bank loan. But unlike a fully traditional bank loan, SBA loans are slightly easier to qualify for. The SBA’s guarantee of a large portion of the loan amount means that there’s less risk lending to you, and banks are more willing to approve your application.

The SBA offers two loan programs that are suitable for business acquisitions: the 7(a) loan program and the CDC/504 loan program.

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.

A 7(a) loan is the more traditional and common SBA financing option, and one that might be suited for a smaller business acquisition.

Paper sheet
Details and Qualifications for a 7(a) Loan

7(a) loans to buy a business offer long terms and large amounts.

They’ll essentially be what you can find at a traditional bank, but slightly easier to qualify for. They’re structured almost exactly the same, with fixed monthly payments.

The SBA lender you work with will general require a strong credit score (around 680 and above), business plan, and sufficient collateral to put up on the loan. You’ll also be asked to make a down payment. Most banks require a down payment of 10%-25% on acquisition loans. The minimum required by the SBA for a 7(a) loan in 10%. Half of that must come from a buyer’s cash, and half can come from a seller’s note.

Here are some of the finer details of these loans when used to buy a business.

Paper sheet
Loan Amounts

SBA loans for the 7(a) program can go up to $5 million in amounts. For getting a loan to buy a business, though, your SBA loan would likely be some percentage of the value of the business you’re buying.

Paper sheet
Loan Term

SBA 7(a) loans come with terms of around 10 years if they’re used for working capital purposes, and with terms of 25 years if they’re used for real estate purchases. In regards to getting a loan to buy a business, you’d likely have a term closer to that 25-year threshold.

Paper sheet
Loan Rates

SBA loan rates are some of the lowest a business owner can qualify for. They vary on what the current US prime rate, but typically hover around 6% to 10%.

Paper sheet
Loan Fees

The SBA charges the lender a fee for the service of the guarantee, but that lender almost always passes down a “guarantee fee” to the borrower. The guarantee fee starts at 3% for loans of more than $150,000. Also be aware that there might be more fees associated with the business acquisition loan, charged by the SBA lender.

Paper sheet
Down Payment

The SBA requires at least 10 % down from the buyer for acquisition loans. Half must come from the buyer’s cash, and the other half can come from a seller’s note if the seller agrees not to be paid until the SBA loan is paid off.

Seller Financing

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 the buyer will pay back with interest over a period of time—typically 3 to 5 years.

Seller financing is often used in conjunction with traditional commercial lending. Having a promissory note would result in less risk to another lender, so that third-party lender might be more likely to work with the given borrower.

Alternative Lenders

A third option for how to get a loan to buy a business when you don’t qualify for a bank or with the SBA is alternative lending.

Non-bank lenders operating primarily online offer term loans that can be applicable for business acquisitions.

medium-term loan, for instance, could give you enough capital to make the business purchase. These loans can go up to about $1 million, and last over terms of one to five years.

Medium-term loans offered by alternative lenders are also slightly easier to qualify for than banks and SBA loans, making it a good option for business owners with not as good personal credit, business financials, and business experience.

Lenders like FundationLending Club, and Funding Circle all offer buying a business loans.

Check My Options

Step 3: Applying for Your Business Acquisition Loan

Now that you know the three most common options for a loan to buy a business, it’s important that you fully compare your options. This way, you’ll know that you’re working with the right type of lender, who’s offering you the best rates and terms for your specific deal.

Ready to take the next step and apply? Here’s what you need to keep in mind as you’re applying for and closing your loan to buy a business.

Gather Your Documents and Get Prepared

As you might have noticed from the extent of step 1 to getting a loan to buying a business, applying to a business acquisition loan is no easy process.

You’ll need to provide a lot of documentation that’s prepared in a thoughtful and thorough way.

To save yourself time, don’t bother submitting an application that’s fully complete. This means that you’ll have to get all your paperwork and financial documentation in order before pressing “submit.”

Remember, a lender is looking at a lot of details about your business and the business you’re buying to qualify you, so you have a better shot at approval if you’ve gathered everything a lender might need to see to understand that you’re a good investment.

And once you’ve applied, don’t be surprised if you have to go through multiple underwriting calls with your loan representative. No matter how thorough your application is the first go-around, they’ll likely as for more information as they begin the process of reviewing your eligibility. Providing this additional information promptly will get you the financing you need sooner.

Get Started Now