How To Get A Loan To Buy A Business (2024)

If you’re interested in entrepreneurship, you don’t always need to start your own business from scratch. Sometimes the opportunity presents itself to purchase an established business, and if it’s the right one for you, it can be a great decision.

However, established businesses come with a price. Unless you have a large pile of cash tucked away, you’ll probably need to learn how to get a loan to buy a business. Here’s how.

1. Check Your Eligibility

In many ways, getting a loan to buy an established business is easier than getting a business startup loan. As long as it’s turning a profit, the business’ success is already proven, after all. The only new thing coming into the equation is you.

Lenders will want to see that you have good credit. The exact credit score you’ll need for getting a loan to buy a business varies by lender, but in general, a score of at least 680 will give you the best approval odds.

Lenders may also want to see that you’ve had experience in the industry of the business you’re buying. If you’ve been a florist your whole life, for example, it might be hard to get a business acquisition loan to buy a structural engineering firm. Be prepared to demonstrate to lenders how you’ve worked in this industry in the past.

Finally, lenders will want to understand your personal finances—how well you manage your own money can be an indication of how well you’ll run your business. Lenders will also expect a down payment, anywhere between 10% to 30% of the purchase price. If you’ve run other businesses in the past, lenders may also want to see documents for these to see your business ownership history.

Related: Business Loan Requirements: How to Qualify For A Business Loan

2. Gather the Required Documents

When preparing to apply for a business acquisition loan, it’s essential to put together an application packet of all of the documents lenders might ask for. This will help streamline the application process and make it easy to locate your documents in case you submit applications with multiple lenders.

Lenders will typically require these documents to evaluate your personal finances and past business history:

• Personal bank statements
• Two years of past tax returns
• Financial statements for any other businesses you’ve run
• List of personal debts, including amounts owed, monthly payment and payoff date

Since you’re buying an existing business, you’ll also need to gather documents from the current business owner. These documents are sensitive because they contain financial details, so you may need to sign a non-disclosure agreement (NDA). At a minimum, make sure you collect these documents from the owner:

• Cash flow statement
• Profit & loss statement
• Business balance sheet
• Two years of past tax return
• Business bank account statement

It can seem like a hassle to ask the current owner for these details, but remember: this is a financial transaction, and to make a good business decision, you should know these details, too. You want to know upfront if it’s a profitable business.

Once you have this information in hand, you’ll need it to create a few new documents of your own to go along with your application packet:

• Business plan: If you plan on changing anything or running it as it already is, make sure it’s written here.
• Letter of Intent (LOI): This letter tells the lender that you’re formally considering buying the business and that you’ve been in communication with the owner.
• Cash flow projections: Estimates of how you think your cash flow will be over a three- to five-year timespan.
• Professional business valuation: This is an independent assessment of the business’ worth, similar to a home appraisal before you get a mortgage, and is one of the most important documents.

3. Choose a Business Acquisition Loan

Once you’ve run through the numbers and you’re confident about getting a loan to buy a business, the next step is to choose the right financing product for you.

Online Business Term Loan

Online lenders offer a variety of loan products to small business owners, including term loans, which you can use to buy a business. They typically have less stringent qualification requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender if you have less-than-stellar credit.

In addition, online lenders often have much faster turnover—some may issue funds as soon as the same business day. However, a major downside of taking out an online business term loan is that they often come with higher interest rates than a term loan through a traditional bank or credit union.

Related: Best Small Business Loans

Traditional Business Term Loan

Traditional business term loans are issued by banks and credit unions. These loans typically come with favorable terms, including lower interest rates, but at a cost: more stringent qualification requirements than online term loans. This means traditional bank loans may be hard to get for a business acquisition unless the business you’re buying has substantial assets and you’re a highly qualified applicant.

SBA Loan

U.S. Small Business Administration (SBA) loans are offered by a variety of SBA-approved lenders. The SBA guarantees these loans in case a borrower defaults, which makes them more attractive for lenders to offer them.

The SBA 7(a) loan is the most common SBA loan and can help cover the costs that come with purchasing an existing business. It can also help you purchase real estate or land, finance equipment, refinance debt and meet working capital needs.

In general, the SBA typically requires you to have a minimum personal credit score of 670 to qualify, but higher scores increase your chances of approval and receiving more favorable terms. It’s typically easier to get an SBA business acquisition loan than it is to get a startup business loan because lenders can evaluate the history of the business you’re buying.

Seller Financing

If the seller is willing and able, another common option is to have the seller finance the purchase of the business. In that case, you’ll need to draw up a loan agreement specifying everything that you’d expect with a bank lender: interest rate, fees, payments due dates, late payment penalties, etc.

This can be a great financing option because you’re often able to get the best rates of all, and you may not need to go through multiple rounds of applications. However, you should still expect the seller to do their due diligence regarding checking your finances and business ownership history.

4. Submit Your Application

The final step is to submit your application, which you can do online or in person, depending on your lender. While you may have already put together your application packet, your lender may require additional documents. Be sure to retrieve any of those documents quickly to keep the application process moving forward.

Your lender will likely request the following information during the application process:

• Your name
• Business name
• Social Security number (SSN)
• Desired loan amount
• Loan purpose
• Business Tax ID
• Annual revenue

Once you submit your application, you’ll have to wait for an approval decision, which varies depending on your loan type and provider. A lender will send you a loan agreement to sign before issuing your funds if your loan is approved.

Other Considerations When Buying a Business

It’s highly recommended to hire a business accountant and attorney before you begin talking to the business owner and the lender. You’ll need their help to create cash flow projections, write an LOI and draw up NDAs and purchasing agreements. Business accountants and attorneys can guide you through the business transaction from start to finish while protecting yourself.

How To Buy a Business With No Money

If you don’t have money to buy a business, you could borrow to make the purchase. However, having no source of cash could make qualifying for a loan challenging.

Traditional banks may require that you put down at least 10% on a business loan. So, if you’re buying a business worth $100,000, you might need to bring $10,000 or more to the table. Online lenders may have eligibility criteria that are more flexible, but your personal credit, the history of the business and its profitability are still factors that impact your business loan approval.

Other ways to buy a business with no money include applying for grants or setting up a crowdfunding campaign. Grants.gov has a database where you can search for small business grants. While small business grants can be tedious to apply for, they offer money you don’t have to repay, which can eliminate a financial burden as you grow your new business.

If you have a compelling story to share, setting up a campaign to get funding from peer support can be a way to raise money for your business acquisition.

Frequently Asked Questions (FAQs)