How To Get A Loan To Buy A Business? In-depth Guide

Buying a business is an exciting venture, but unless you have a large sum of cash lying around, you’ll likely need a loan to make it happen. In this guide, we’ll walk you through the steps on how to get a loan to buy an existing business, so you can get the funding you need to acquire the business of your dreams.

The best way to get loans to buy a business is by checking eligibility, preparing required documents, choosing the right loan type, and applying with a strong business plan. Lenders also consider your credit score, industry experience, and down payment. With proper preparation, obtaining a loan to buy a business becomes much easier.

Step 1: Check Your Eligibility

Before applying for a loan, the first thing you’ll want to do is check if you’re eligible. Lenders want to know that you’re financially stable and capable of managing the business you plan to purchase. This is the first step toward obtaining a loan to buy a business.

Credit Score

Most lenders will check your credit score. It’s generally a good idea to have a credit score of 680 or better for the best chances of approval, though the precise score required can vary from lender to lender. A higher score shows that you’ve managed your finances well, which helps build trust with lenders.

Industry Experience

Lenders may also look at your experience in the industry of the business you’re buying. For example, if you’re looking to buy a hair salon, having experience in beauty services would increase your chances of getting approved. If you’re new to the industry, it could be more difficult to secure loans to buy a business.

Down Payment

Expect to make a down payment of at least 10% to 30% of the business’s purchase price. This amount shows the lender that you’re financially invested in the business and lowers their risk.

Step 2: Gather the Required Documents

It’s time to collect the required paperwork for your loan application once you are certain that you fulfill the fundamental eligibility requirements. Having all of your paperwork in order will speed up the process and ensure that you don’t miss any important information.

Personal Documents

These are the documents that lenders will use to evaluate your finances and financial history:

• Personal bank statements
• Two years of tax returns
• Financial statements for any previous businesses you’ve owned
• List of personal debts (including amounts owed, monthly payments, and payoff dates)

Business Documents

Since you’re buying an existing business, you’ll also need documents from the current business owner. These include:

• Cash flow statement (shows the business’s financial health)
• Income statement (P&L statement) (shows the business’s profits and losses)
• Balance sheet (shows the business’s assets and liabilities)
• Two years of the business’s tax returns
• Business bank account statement

You might have to sign a non-disclosure agreement (NDA) to access these private documents if you’re purchasing the company with business loans to buy an existing business.

Additional Documents

Besides the above, you’ll also need to prepare some additional documents, including:

• Business plan: Detailing how you plan to run the business after purchase.
• Letter of Intent (LOI): A formal letter expressing your intent to buy the business.
• Cash flow projections: A forecast of your business’s cash flow over the next 3–5 years.
• Business valuation: An independent assessment of the business’s worth.

Step 3: Select the Appropriate Loan Type

It’s time to choose the best financing type for your business acquisition now that everything is in order.

Business Acquisition Loan

A business acquisition loan is specifically designed for purchasing an existing business. This is typically offered by banks or other financial institutions. It can be used to purchase the entire business or parts of it, such as assets, land, or equipment. These are one of the most common loans to buy a business.

Seller Financing

With seller financing, the seller consents to allow you to pay for the business in installments rather than in full upfront. This can be a good option if you have trouble securing a traditional loan but can make regular payments over time.

SBA Loans

If you’re in the U.S., a Small Business Administration (SBA) loan is another option. These loans are guaranteed by the SBA and can offer lower interest rates, longer terms, and smaller down payments, making them a great choice for those considering business loans to buy an existing business.

Step 4: Submit Your Application

Once you’ve selected your loan type, it’s time to submit your application. Be sure to double-check that all your documents are complete and accurate before submitting them. Here are the basic details you will need to include:

• Your personal details: Name, address, and contact info
• Business details: The name of the business, annual revenue, and Canadian business number (if applicable)
• Loan amount: The amount you need to buy the business
• Loan purpose: Clearly explain how you plan to use the loan (e.g., for buying assets or for the full business purchase).

The lender will review your application when it is submitted, and if approved, you will sign the loan contract prior to the money being disbursed. This is the final stage of obtaining a loan to buy a business.

Other Considerations When Buying a Business

While getting a loan is a key part of the process, there are a few other things to consider when buying a business:

• Hire a business accountant: They’ll help you create projections and assess the financials of the business.
• Speak with an Attorney: A lawyer can assist you with NDAs, contracts, and the legal ramifications of purchasing a business.

These business professionals can ensure that you’re making a smart financial decision and protect you from any potential pitfalls when dealing with loans to buy a business.

How To Buy a Business With No Money

What if you don’t have the cash for a down payment? Can you still buy a business? Yes! It’s possible, but it’s going to be trickier.

Here are a few options:

• Crowdfunding: You can use the internet to raise money from friends, relatives, and even complete strangers.
• Grants: Some small business grants may be available to help you buy a business, although they can be hard to secure.
• Partnering with an investor: Find someone willing to invest in the business alongside you.

Conclusion

Buying a business is an exciting journey, but it requires careful planning and financing. By following these steps, you’ll be well on your way to securing the business loans to buy an existing business you need to purchase the business and start your entrepreneurial adventure. Remember to check your eligibility, gather all necessary documents, choose the right loan, and submit your application. With the right preparation, you can secure loans to buy a business and take the next steps in your business ownership journey.

FAQs:

Can I buy a business with 5% down?

Typically, lenders expect a down payment between 10% and 30%. However, there are some options, like seller financing or certain SBA loans, that may offer lower down payment requirements. 

How much will banks loan to buy a business?

Banks may lend anywhere from 50% to 80% of the business’s purchase price, depending on your qualifications, the business’s profitability, and other factors.

What are the most common loan types for buying a business?

The most common loan types include business acquisition loans, seller financing, and SBA loans. Each has its pros and cons, so be sure to choose the one that best suits your situation. 

Can I get a loan without experience in the industry?

While it’s possible, it’s harder to secure a loan without experience in the industry. Lenders want to see that you understand the business you’re buying. However, if you can demonstrate strong management skills or have partners with industry experience, you may still qualify.