Business Financing

Mike Jani, MBA

Principal Broker & Franchise Consultant

Are Loans available to Buy a Business?

The short answer is yes.

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.

How do I qualify for a loan?

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.

What options are there to finance my business acquisition?

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.

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.

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.

An SBA 7A loan allows the buyer to put down a lower down payment, typically 10-20% of the purchase price, and finance the purchase over a longer time, up to 10 years.

An SBA 504 loan can be paid over 20 years if it finances the purchase of real estate or equipment.

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.

In order for a business buyer to obtain an SBA loan, the business and the buyer need to qualify. The business, through its tax returns, must show that it provides enough money to pay the buyer’s income needs, repay the SBA loan, and provide a margin of safety. The buyer must be creditworthy and have satisfactory business experience.

More details on SBA loans can be found at: https://www.sba.gov/funding-programs/loans