Getting a Loan to Buy a Business

In this day and age, startups are a common venture. The number of entrepreneurs has increased steadily during the past decades, which is no surprise considering the development in technology, access to information, and financial infrastructure. However, in many instances, the option of buying a business can be easier and more lucrative.

Getting a loan to buy a business may be the only way to start off. Discover some of your best business acquisition loan options - FamilyMoney

Getting a loan to buy a business may be the only way to start off. Discover some of your best business acquisition loan options - FamilyMoney

Business Acquisition Loans

If you are looking into getting a loan to buy a business, then you should first consider your options. The most common types of loans available to buy a business are the following:

  • SBA loan: SBA loans are the most common loans in terms of buying a business. They provide banks with safety measures, which is why they are more easily approved.
  • Seller financing: This is another popular source of financing a business acquisition. In this case, the current business owner lends you around 10-60% (possibly more) of the funds required.
  • Bank loan: While a traditional bank loan is more challenging to obtain, it is a possibility. To get approved for a loan, you must have an excellent credit rating and history. A loan may also be granted if the company owns significant assets.
  • Rollover for business startups (ROBS): This option is not a loan. It implies cashing out your retirement savings to purchase the business. A ROBS is a quick and easy way to gain the funds needed, and the costs involved are very low.
  • HEL or HELOC: A HEL, home equity loan, and HELOC, home equity line of credit, are also options. They both imply putting your home as collateral to be approved for a loan.
  • Loans from friends or family: The National Venture Capital Association has found that 15% of new businesses get financing from family or friends. Therefore, it could be a possibility in terms of business acquisition as well.
  • Leveraged buyout: Leveraged buyout is when you leverage part of the company’s assets to gain the capital needed.

Loan to Buy a Business – Where Can I Get One?

To apply for a loan to buy a business, you can turn to your bank, a financial institution, or alternative lenders. These days, there is a myriad of loan companies that can provide this type of loan. We recommend that you begin by researching the different lenders and their terms and conditions. Aspects such as requirements, interest rates, and other conditions can vary a lot among different parties. Therefore, it is advisable to take some time to find the best options.

Did you know? SBA loans are considered the easiest loans to receive when buying a business.

How Much Does a Business Purchase Loan Cost?

Naturally, the cost of the loan depends on several aspects, such as; the type of loan, the loan company, your credit score, the loan amount, requested repayment period, your collateral (if any) and the financial status of the business.

In terms of SBAs, the approximate interest rates are as follows.

  • SBA CDC/504 loans: 2.28% – 2.83%
  • 7(a) SBA loans: 5.50% – 9.75%
  • SBA Coronavirus disaster loans: 2.75% – 3.5%
  • Other SBA Disaster loans: 4.00% – 8.00%

Can I Get an SBA Loan to Buy a Business?

In terms of business acquisition, SBA loans are considered the easiest loans to receive. This is due to that the U.S. Small Business Administration in part guarantees them. Therefore, they are usually the first alternative the lender will consider. SBA loans are also beneficial, as they come with some of the lowest interest rates on the market and generous repayment terms.

However, there are still many SBA loan requirements. The lender will consider the following aspects:

  • Your credit score
  • Your credit history
  • Existing debts
  • Business plan
  • Sales agreement

You must also provide the necessary information about the business you intend to acquire including; the business’ credit score, records of financial performance, records of financial valuation, tax returns, financial projections, business contracts, business leases and other financial information.

You may be entitled to other business funding besides for SBA loans. Click here to find out your options.

Find out your business funding options NOW, with Family Money

How Can I Buy a Business With No Money?

In some cases, it is possible to buy a business with no money. Most of the time, though, it involves some form of financial transaction or compensation.

If you have no financial resources available, you can consider a few of the options addressed earlier.

  • 100% seller financing
  • Leveraged buyout
  • Loans from family or friends

In some cases, you may be able to negotiate further with the seller. This may be possible in the situations below.

  • Pay on performance: You and the seller make a performance plan for the business. You can agree that when the company has reached a particular milestone, you will pay a specific amount.
  • Choose an underperforming business: If you choose an underperforming business, the seller may be more open to accepting delayed payment.
  • Offer compensation instead of money: This depends on the nature of the company. Let’s say you want to buy a small, underperforming shop, which is fully owned by the seller. Instead of buying for the property, you can offer to pay for a complete renovation of it, and start to rent it after a few months. Since this deal would be beneficial for the lender, they may accept the idea.

Business Acquisition During COVID-19

The COVID-19 pandemic has severely shaken the mergers and acquisitions (M&A) market. If you’re thinking about acquiring a business during the pandemic, consider these questions:

  • Why is the current owner selling the business?
  • What challenges was the owner unable to overcome?
  • How would you overcome them?
  • Is it even possible to rebound the business?
  • How much capital would you need to rebound it?
  • How much capital would you need to secure the business if another outbreak would take place?
  • What potential does the business have to survive the coming recession?
  • Frequently Asked Questions?

    Is it easier to get a loan for startups?
    Yes, often it is easier to get a loan for start ups, however, it is not always the case. For instance, banks are more willing to grant SBA loans for business acquisitions.
    Is business acquisition better than a startup?
    There are certain advantages to a business acquisition. For instance, it involves buying a company that is already functioning. It has proven to be somewhat successful. However, which option is better depends on your vision and circumstances.
    Do all business loans involve a credit check?
    If you apply for a loan from a bank or loan company, then yes.

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