Successfully buying a business is an exciting adventure. One of the most challenging aspects of purchasing your own company, though, is determining how to finance the purchase. Without adequate financing, you can’t reach your dream of business ownership. Fortunately, there are several avenues to finance a business purchase.
Buying an established business is less risky financially than financing a new venture. This fact makes it more likely you’ll be able to find financing. When you purchase an existing business, you inherit a customer base, company reputation, and employees. You also take over the company’s cash flow and profits. The fact that the business has already proved itself means that small-business loan lenders are more likely to give you a loan.
Follow these steps to financing a business purchase, and you’ll soon be calling yourself a business owner.
Determine your financial requirements
Before making a business purchase, calculate how much money you’ll actually need, advises Jonathan Aspatore, the CEO and founder of The ExecRanks. He founded two prior businesses, which he sold to Fortune 500 companies.
“Plan for 20% more costs than you imagined, both for the eventual purchase price and for professional services bills, such as from lawyers and accountants,” he says. Leaving wiggle room in these areas helps ensure you borrow as much money as you require.
Lawyers and accountants are good to have on your business acquisition team. They can help you determine whether a business purchase is a good one. Such professionals will review and verify information about the business you want to acquire, including how profitable it is and important considerations, such as existing inventory and receivables.
Plan for 20% more costs than you imagined, both for the eventual purchase price and for professional services bills, such as from lawyers and accountants.
Your acquisition team will also help you determine whether the asking price for the business is a fair one.
Gather the necessary documents
To apply for a business purchase loan, you’ll need the following documents:
- Personal tax returns
- Personal bank statements
- Business bank statements provided to you by the business you’re acquiring
- Business tax statements provided by the business you’re acquiring
- Financial statements provided by the business you’re acquiring
- Business legal documents, including franchise agreement, articles of incorporation and commercial lease paperwork
Find out if you qualify
Check out your credit score. The higher your credit score, the more options you’ll have for business loan funding. A credit score of at least 680 makes it more likely you’ll be able to get funding to purchase a business. There are also online loan providers, such as SmartBiz, which provide SBA loans for individuals with scores as low as 560.
Look at the length of business. The longer the business you’re buying has been in operation, the better. For most online loans, the business needs to be operating for at least a year, and the requirements go up to two years for traditional bank loans.
Analyze revenue. Online lenders and banks require a minimum annual revenue, which is often in the $50,000 to $150,000 range.
Examine cash flow. Directly related to revenue is the business’ cash flow, which will determine if you have enough money to keep the business operating while paying necessary bills, such as your loan payment. This takes doing a careful analysis of the financial records of the business you want to buy, as well as your finances.
Choose the best financing option
Various financing options exist for funding the purchase of a business. Which you choose will depend on the financial health of the business and your financial situation.
Traditional bank loans
Banks offer loans that allow you to purchase a business, including term loans, commercial mortgages, and lines of credit. They often offer competitive interest rates. Banks generally take a minimum of two months to provide funding, however, which often makes this option unrealistic. Wait too long and you risk losing the opportunity to buy the business.
You may also have a hard time qualifying for a traditional bank loan if the business isn’t showing a high enough sales volume, you don’t have sufficient cash reserves and/or your credit isn’t excellent (700+).
Small Business Association (SBA) loans
The Small Business Association (SBA) offers business loans through some banks. These loans are a good option if you have trouble qualifying for a traditional bank loan. The SBA’s 7(a) loan program offers up to $5 million.
If you’re in a hurry for funding, your purchase may qualify for the SBA Express, which gives up to $350,000. And if you’re a veteran, you can qualify for the SBA Veterans Advantage, which offers either $350,000, if processed under the SBA Express, or up to $5 million, if processed under the SBA 7(a) loan program.
A variety of online lenders offer the opportunity to quickly fund your business purchase. Such lenders provide loans up to an average of $500,000 and lines of credit that allow you to purchase a business.
The APR on online lender loans varies widely, depending on the size of the loan, your credit rating, the repayment term and whether you’re providing collateral. APRs for online loans tend to range from 6% to 25%, or even higher.
Approval is more likely with online lenders, and you’ll often get funding very quickly. In some instances, you’ll have the money to buy your new business in as little as 24 hours.
Once you’ve chosen the type of loan you want, gather your necessary paperwork and fill out the required applications.
Check out SuperMoney’s Best Business Loan Companies where you can read reviews and compare the rates of leading business loans providers.
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.