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Grayson Baker
Grayson Baker

Getting A Loan To Buy An Existing Business

Conventional, SBA, and online lenders typically instruct small business owners to submit financial documents for the existing company, including cash flow, operating expenses, and physical assets. You should work with the current owner to get business valuation details and financial statements.

getting a loan to buy an existing business

This head start comes at a cost, however. And if your personal savings don't cover the cost of your purchase, chances are you'll be looking to apply for a business loan. Depending on a range of factors, you may be able to get a loan to buy an existing business, but first you'll have to size up your needs and requirements, prepare the right information and documents, and shop for the right lender.

When you're buying an existing business, lenders want to know about both you and the business you want to buy. That's fair: Up to this point, you and your prospective business have had two entirely independent histories.

As they would with any loan, lenders want to know about your personal credit history. Do you have a history of successfully managing debt? Do you handle credit responsibly? They'll want information about your income, your current business (if you have one) and any relevant experience that makes you a good candidate for running this new business successfully. Here's a short list of items to prepare:

If you already own a business and are looking to acquire another to expand operations or change your business model, lenders will also want to know about the financial health of your existing company. Check with your lender for a full list of financial information they require, but be prepared to provide the following:

Further, they'll want to make sure your business strategy is sound and that your proposed business purchase has the income potential to allow you to repay your loan. Proving that could require showing:

Before you can apply for a loan, you need to assemble some basic information. Many of the answers you need will require input from the seller. Although this may seem cumbersome, it's also an opportunity to get some cold, hard facts about the business you're hoping to buy.

Business loans are available from a variety of sources. Your current bank or credit union (or the one your prospective business uses) is an obvious starting point, but you can also shop around for small business lenders. Online lending platforms like Fundera connect small business borrowers with multiple lending sources for a range of business loans including Small Business Administration (SBA) loans, business lines of credit and term loans. According to Fundera's website, borrowers with at least $150,000 in annual revenues, one or more years in business and credit scores of 600 and above have been successful in securing loans.

For many small business owners, SBA loans work where other lending options do not. The SBA doesn't make loans to small businesses; instead, it guarantees loans from lenders like banks and credit unions, which takes some of the risk out of lending. As a result, SBA loans typically have favorable interest rates, but also have specific criteria borrowers must meet to qualify. Look over the SBA's 7(a) Loan Application Checklist to learn more.

Some alternative lenders also offer small business financing and may offer business loans to entrepreneurs who have at least $50,000 in sales, have been in business for 12 months or more, have no bankruptcies or tax liens and own at least 20% of their business.Additional Ways to Finance Buying a BusinessGetting a loan to fund a business purchase isn't your only option. If you can't find a willing lender or your approved loan amount doesn't cover the cost of the business, consider these alternative funding ideas:

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.

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.

Because your lender will need to get approval from the SBA to back your loan, the application process and paperwork for an SBA 7(a) loan can be lengthy. However, these loans typically boast better terms than traditional small business loans, and sometimes even come with counseling to ensure your business runs efficiently.

One distinction: if you are a sole proprietor, you will not need to provide a separate personal guarantee for your SBA loan because you execute the note yourself as a borrower (instead of as a business).

Lenders review a variety of criteria when evaluating your application for a business acquisition loan. The importance placed on each factor may vary depending on the type of loan you apply for. For instance, a term loan, such as an SBA business acquisition loan, will typically require a down payment minimum. A line of credit application may place more emphasis on your revenue and cash flow.

Business acquisition loan amounts range from $250,000 all the way up to $5,000,000. The amount you qualify for depends on a number of factors, including your credit score, company revenue, and existing debt. Every lender will review these factors to make sure your company can safely handle your new loan payments.

The first thing you need to think about is your offer to the seller. While using an SBA loan allows you to offer higher multiples because of the benefits we have already discussed, the business still has to pass a third-party valuation.

When purchasing a business with an SBA 7(a) loan you must acquire 100% of the business. Even if you are buying out existing partners, the change in ownership must result in 100% ownership, otherwise, the SBA loan will not be approved.

This is probably the most important ratio the lender will look at. The business needs to have a debt to earnings ratio of at least 1.25:1 So, the business needs to earn at least $1.25 for every $1 of loan payments it has. You should have a pretty good idea of what your loan payment will be before submitting the application.

Running a small business is not a job for the faint of heart. Entrepreneurs work long hours and take on many different challenges requiring a broad range of business skills. Potential business owners looking for a new venture may choose to build a company from the ground up, or buy an existing company or franchise. Companies with a loyal customer base and steady revenue stream can be enticing, though the initial investment might be higher than starting small and building slowly. Let's look at some of the pros and cons of buying an existing business.

There are several advantages of buying a successful existing business, from convenience to a quicker (and safer) return on investment. Knowing the benefits of this business strategy may well tempt the aspiring entrepreneur.

An established business often enjoys brand loyalty with customers and is known in the market. As a new owner, you may have ideas about tweaking the existing brand, but you won't need to make a large investment in marketing to develop something completely new. Adjusting a brand when you already have a loyal customer base is much easier than building a market presence from nothing.

Among the many pros of buying an existing business, perhaps none is more critical than starting out with the workforce and established operational systems that presumably made the company attractive enough for you to buy it in the first place.

An existing business should have systems in place to track financial information, inventory, and sales, as well as to perform other essential tasks. Starting from scratch means spending time and money to develop these processes. In cases where outside assistance would be required to set up a new venture, some gains in cost-efficiency may be recognized by buying an established business instead.

Growing an already established revenue stream can provide a larger payoff compared with initial business generated by a startup. Practically speaking, the energy and effort required to grow either a new or established business by 25 percent may be about the same. The key difference is there can be more financial reward with an existing business purchase because the added revenue stream comes from a larger base of customers. The original owner has lent expertise and knowledge developed over the years to build more efficient processes, which in turn can bring in more profit. Initial investments in marketing, which generally take years to pay off, may also benefit second owners.

As with any investment, there are both pros and cons. Research the company as much as possible prior to making an offer. Don't limit your information to what is presented by the current owner; get out into the community and talk to vendors, customers, and anyone else who has dealt with the business for sale. Engage a financial adviser to study the information provided by the current owner and offer advice on pricing. You can also work through the buying-an-existing-business checklist provided by SCORE. There are several factors to consider, but generally aspiring entrepreneurs must be mindful of the initial outlay of money and wary of the situation they're walking into. 041b061a72


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