Loan to Buy a Business

Loan for Business Acquisition

There are many entrepreneurs who love to dive right into business. They do not want to start from scratch. They will prefer to buy an already existing business and continue from where the previous owner left off. Some people prefer purchasing existing businesses because the business is already producing cash flow and profits. The new owner will only need to increase the current earnings. He or she does not need to build from scratch. The business has an already established customer base. One thing that new businesses struggle with is establishing a good reputation and loyal customer base. When you purchase an existing business, you do not need to deal with that problem. If you decide to maintain the staff of the business, you will have already trained staff who know a lot about the business. There are already established systems and procedures in the company. You will not need to invest in identifying proven methods for a successful business. Most existing businesses have patent and copyrights, and so there is no need to go through the process of obtaining one.

Interestingly, some entrepreneurs also love to start new businesses. However, the enthusiasm goes down when the business is set. This means some entrepreneurs are ready to sell their businesses when the price is good for them. Once you meet the seller who is willing to sell the business you want to purchase, the next thing to consider is the funding. Purchasing an existing business with a huge investment and it requires a lot of money. If your family and friends can afford to fund your loan, it is a good thing. However, most people rely on loans to purchase businesses.

Loan to Buy a Business
Loan to Buy a Business

Business Acquisition Loan Options

There are small business administration loans for people who want long payment terms and low interest rates. There are also Rollover for Business Startups (ROBS) which is ideal for borrowers who have a huge amount of money in their retirement account. They can use this as down payment for an SBA loan. There is also the seller financing option where the seller funds part of your purchase.

The first step to take when you want to apply for a business loan is to identify the loan type. You should know the business loan options that will suit your demands. The most popular loan type is the SBA loans. These loans are guaranteed by the SBA and are issued by banks. These loans are easier to qualify for compared to traditional loans.

Two SBA loan options are great for business acquisitions. They are the 7(a) loan program and the CDC/504 loan program. The 7(a) is the most common, it is easier to obtain, and it is more like the traditional loan. The CDC/504 loan program, on the other hand, is not easy to obtain. This option is used for the purchase of major fixed assets.

You can also consider seller financing if you have a problem getting an SBA loan. Here the seller can fund part of your purchase and then you will pay back in 3 to 5 years. Usually, the lender takes a promissory note in place of the amount you will pay later. The money is paid back with interest. You and the lender will agree on the interest rate and the payment schedule. There are also opportunities for online lenders to grant loans for business acquisitions. Online lenders can offer you medium term business loans to cover the amount you need for the acquisition. This option is good for borrowers who do not have good credit or business experience. It is easier to meet the requirements of this loan compared to the SBA loan. However, the interest rate is higher than the SBA and traditional loan.

Loan Requirements

The next thing is to check the requirements of the loan options to know the ones you will be eligible for. For the SBA loan, you will need to have a personal credit score of at least 680. Lenders also expect you to make a down payment of at least 10% of the total amount. The lender may ask for collateral to secure the loan. Lenders also want to know whether you can successfully manage a business to repay the loan. Lenders require that you bring proof of industry experience. You should have at least three years managerial experience in the industry. The business you intend to buy should also have the potential to succeed. Lenders prefer a financially strong business. You will also need to provide documents including purchase agreements and the business’ financial documents.

ROBS, on the other hand, is a program that allows you to access your retirement fund without paying taxes. The major requirement for ROBS is a qualified retirement fund. If you have a minimum of $50K in your retirement account, ROBS providers can help you to use that cash to acquire the business. You can access your funds faster than when you apply for traditional loans. With the seller financing option, there are no specific requirements. Every lender has his or her requirements. However, sellers typically fund between 10 to 60% of the total purchase.

Business Acquisition Loan Application

After you have identified the loan options and their requirements, the next is to begin the actual loan request process. You should identify the option that will be excellent for you. For instance, if you have at least $50K in your retirement account, you should go in for the ROBS program. If cannot provide a business experience or good credit, it will be better to look at online loan options. Once you have decided on the option to go in for, you should put your documents together. The requirements mentioned above are the common requirements that lenders ask for. However, the lender may ask for other additional documents. You should be prepared to cooperate with the lender. If you provide the additional documents the lender will request promptly, you can access the loon early. You should have all the requirements in place before you proceed to submit them for the loan.

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