Buying a business is a big investment and taking time to find the best loan is very important. The good news is that it is possible to get a loan to buy a business with favorable terms. It only requires a little preparation by both parties involved. Business acquisition loans can be used to purchase an existing business, purchasing a franchise or refinancing. In most cases, a business for sale normally attracts multiple buyers.
One of the main reasons why business acquisition becomes unsuccessful is working with the wrong lender. Since this type of transaction is also time sensitive, finding the best lender is imperative. When it comes to bank loans, both you and the potential business have to meet high standards before being approved. So when it is almost impossible for you to access a traditional bank loan, the following are alternative options for you to get a loan to buy a business.
When looking for business acquisition financing, SBA loans is a good place to start. Compared to other financing options, SBA loans have lower interest rates and flexible repayment terms. The only downside is that qualifying for an SBA loan is not easy, and even if you qualify, it may take up to 120 days for the loan to be processed. It is however easier to be approved for an SBA loan for purchasing an existing business than for business start up. This is because an existing business has a track record and it is easier for the lender to know if the loan will be repaid. Part of the loan is usually guaranteed by the U.S Small Business Administration, and this makes it a safer loan option for the lender. It can also be a good choice if you do not have enough collateral to be approved for a traditional bank loan.
SBA loans have the same qualifications as traditional bank loans. You need to have a strong business plan to be approved. Businesses can borrow up to $5 million for business acquisition. The interest rates vary from 6% to 9% depending on the market trends. If you borrow a loan amount of more than $150K, you will be charged a guarantee fee of 3% of the loan amount. The maximum repayment term for an SBA loan is 25 years for real estate and 10 years for working capital. You also should have a good credit score to qualify for an SBA loan.
Business purchases are time sensitive, which means that you need to act fast before losing out on the opportunity. This is where roll over for business startups, ROBS, come in. With this option, you can access your retirement savings to purchase a business without any taxes or early withdrawal fees incurred. Besides, you can get the funds within 2 or 3 weeks. This is about four times faster compared to a typical bank loan. Since this is not a loan, the lender will not require future payments. It is a great way of acquiring funds without piling up business debts.
If being approved for a traditional bank loan is a nightmare, seller financing is another alternative. This involves getting a loan from the seller of the business. Part of the business purchase price is taken by the owner. Seller financing is somewhat the same traditional bank loans. The seller may request for personal financial statements, check your credit report and ask for other important information before making a decision. Some sellers may also require collateral to secure the loan. This option is however not available for all deals.
Home equity loans (HEL) and home equity line of credit (HELOC), can be a good option if you are willing to issue your personal home as guarantee of payment. Small business owners can use a home equity line to fund part of the business purchase price. To qualify for a home equity loan or a home equity line of credit, you need to have 20% to 30% equity in the home and a high credit score of more than 620. One advantage of the loan is that it is less expensive compared to traditional bank loans. This financing option can be used for anything, including business acquisition.
It is common to borrow from friends and family. In fact, many startup businesses get loans from close friends and family members. Buying an existing business can be more expensive than what you can afford to raise from these groups of people, but it can be a good way to raise part of the finances you need. As much as friends and family members are close to you, it is important to make it a business transaction. It should be in writing and you also have to pay back the money, just like with any other loan.
In most cases, business brokers have the experience in buying and selling of a business. They have a clear understanding of the market, expected price ranges, the available inventory and much more. If you give them an idea of the type of business you are looking for, your timeline and the price range, you will end up saving on both the time and effort.
The question on where and how to find the best loan to buy a business comes with many answers. But in the end, it takes careful planning and analysis to finance a business acquisition. If the business you want to acquire is profitable and well established, there are high chances that you will qualify for a business acquisition loan. Having an attractive credit history is also the key to get your loan to buy a business approved.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.