Top 7 Funding Options for Buying an Established Business
JB
Last updated 03/19/2024 by
Julie Bawden-DavisDo you dream of owning your own business but are afraid of the scary statistic that 50% of businesses with employees fail within five years? Buying an established business may be the answer to your prayers.
“Businesses with long track records of growing profits—ones with value in hard assets, owner experience, and good credit—are businesses that lenders are more likely finance,” says commercial property broker Kevin Vandenboss, owner of Vandenboss Commercial.
In order to fund your dream business and become your own boss, consider the following seven options for financing the purchase of an existing business.
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1. Buying an established business with a bank loan
Many local banks offer their own products or SBA (Small Business Administration) government-backed loan programs.
If you can show strong financials for the business you wish to purchase, you can most likely get a bank loan, says Deborah Sweeney, CEO of MyCorporation.com, which offers online legal filing services for entrepreneurs and businesses.
“The better the history of the company and the more positive its outlook, the more likely you’ll get a favorable bank loan [with a low interest rate],” says Sweeney. You must also have a great credit score of 700+.
Unless the company makes a significant amount of revenue and is selling for more than $200,000, a bank loan might not be a good choice. These loans are also time-consuming, and approval rates tend to be low. You may even need to make a large deposit at the bank as collateral against the loan.
“In most situations, the bank is also going to require that you have some sort of industry experience in the business you’re buying,” says Vandenboss. “You’ll get bonus points if you’re already operating the same type of business and making a profit.”
2. Credit union loans
Credit unions are nonprofit financial institutions owned and controlled by members. They tend to offer lower interest rates and fees than banks and can have more flexible lending requirements.
In most situations, the bank is also going to require that you have some sort of industry experience in the business you’re buying”
“I’ve had luck with credit unions because they grant loans based on what makes sense,” says Vandenboss. “Credit unions tend to have a more personal approach to the underwriting, as opposed to following a strict set of guidelines. If the deal to buy an established business makes sense, they’re likely to make a conventional loan on it.”
Credit unions generally have eligibility requirements for members, such as working in a certain industry, going to a particular school, or being a member of the military.
3. Online Business Loans
When considering the purchase of an established business, choose from a wide variety of online business loans.
Business acquisition loans from online lenders have a streamlined application process and higher approval rates than banks and credit unions.
While some online lenders feature low interest rates, others require you to pay a high interest rate. For that reason, it’s important that you compare lender rates and terms carefully.
4. Online Personal Loans
Getting a personal loan can also allow you to quickly fund the purchase of a business. As a matter of fact, personal loans are commonly used to finance new ventures. It’s important to keep in mind that while some personal loan lenders are open to you using the funds for business, others will deny loan applications if you’re an entrepreneur wanting to start a business.
The personal loan application process is a simple one. Low interest rate are often available, but different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
5. Home equity line of credit (HELOC)
In some cases, it makes sense to borrow against your house with a home equity line of credit (HELOC) to buy an established business.
“One of the best types of loans with the best rates is a home equity loan, if you have the equity available,” says Vandenboss. “The interest rates will almost always be low and the terms longer, making it easier to manage payment.”
Stretching payments as much as possible can be important in the early days of business ownership. Interest you pay on the HELOC is also tax deductible.
Before taking money out of your home with a HELOC, consider that you’re using your home as collateral. If your business does poorly and you fail to make your HELOC payments, you risk losing your home. Depending on how much equity you have in your home, there may not be enough to cover the cost of the business you want to buy.
6. Seller financing
Rather than applying for a loan with a third party, you can offer to pay the owner for his or her business in installments. In effect, the owner acts as a lender. Sweeney says, “Depending on the circumstance of the owner, this may be a good option for both parties.”
If the current business owner is having trouble finding a buyer, she may decide to sweeten the deal by financing part of the sale price. Having regular income, rather than one big payout, may also be better for her tax situation.
You get the luxury of time by paying as you go. This may allow you to budget your cash flow more effectively.
You’ll need to have a lawyer draw up a payoff agreement. It’s your responsibility to pay for the business as agreed, even if it ultimately fails.
7. Angel Investor
Perhaps you know a successful business owner or wealthy individual who believes in you and your business. Such an angel investor may be open to providing you with start-up capital. Angel investors generally invest during the startup stage. They give you seed money in exchange for equity in your company.
It’s important to realize that the angel investor will essentially become your partner. This means that you will lose some control of your company. You’ll also require a lawyer to draw up the necessary paperwork.
Additional Considerations
It pays to do your homework prior to applying for funding. Always compare lenders, rates, and terms before making a decision.
Keep in mind that certain situations will make financing the purchase of an established business more difficult. “If the business that’s being purchased includes real estate, equipment, vehicles, and the like, it’s typically easier to get a loan,” says Vandenboss.
He adds, “Sometimes, the real estate may be worth close to the full purchase price of the business, which allows the buyer to finance the purchase with a mortgage on the property.”
The type of business you’re purchasing is another factor that can make it difficult to get funding. “The businesses I’ve found to be the most difficult to get funding for are restaurants, bars, and health clubs,” says Vandenboss. “One reason is that restaurant and gym equipment lose value quickly. So many restaurants and gyms go out of business that there are plenty of opportunities to buy used equipment for pennies on the dollar.”
Find the best loan for your needs by visiting SuperMoney’s business loans review page.
JB
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.
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