Our guide details how to get a loan to buy a business, from gathering required documents and reviewing company data to applying with your chosen lender and signing the final purchase agreement. Depending on the loan type and lender, there are various allowable uses of funds, but you’ll typically be allowed to use loan proceeds for the initial business acquisition and to supplement cash flow for a short period following the purchase.
- Step 1: Gather Required Documents
- Step 2: Contact the Business Owner(s)
- Step 3: Request & Review Company Data
- Step 4: Select the Right Type of Financing
- Step 5: Choose a Lender, Apply & Get Approved
- Step 6: Sign a Letter of Intent & Conduct a Final Due Diligence Review
- Step 7: Sign the Purchase Agreement & Get Funds Disbursed
- Frequently Asked Questions (FAQs)
- Bottom Line
Step 1: Gather Required Documents
To begin the process of getting a loan to buy a business, there are a variety of documents you should prepare that will be requested by both the potential lender and business you’re interested in acquiring. That said, the exact list of required items can vary depending on the business owner and lending institution.
Below is a list of commonly required items for a business acquisition loan:
- Purchase contract/offer to purchase
- Business and personal tax returns (past three years)
- Balance sheet (year-to-date)
- Profit and loss statement (year-to-date)
- Cash flow statement (year-to-date)
- Business lease agreement
- Rent rolls, if applicable
- Business loan agreements
- Terms and conditions for other business debt
- Documentation on type and value of business assets
- Business licenses and articles of incorporation
Step 2: Contact the Business Owner(s)
After scoping out the business you’re interested in, you should contact the owner to express interest in purchasing the business. In most cases, you’ll be asked to sign a nondisclosure agreement (NDA), as you’ll be subject to confidential information about the company’s finances and daily operations.
Signing an NDA will allow the business owner to share information with you. This enables you to make an informed decision as to whether you want to continue the process of buying the company.
Step 3: Request & Review Company Data
With a fully executed NDA, you can conduct a thorough investigation of the company’s financial records. These documents should include many of those we mentioned in Step 1. While lenders will also evaluate these items to determine whether to approve you for a loan, you must conduct your own review to ensure it represents a good investment.
Using the financial information gathered in your research, you can use our business valuation calculator to see if the company’s finances support your purchase price. In addition to what the business is currently worth, you may want to consider some of the following questions:
- Does the company’s finances support the price you’re willing to pay?
- What potential future long-term risks exist?
- Do you believe the company’s past revenue earnings will continue?
- What changes do you expect to make to business operations?
- What expenses do you expect to incur within the first year of ownership?
Step 4: Select the Right Type of Financing
There are various loan types applicable to financing your business acquisition. Below are some options you can choose from, each with its own rates, terms, and qualifications. Many of these are also great for startups, which we go into in greater detail in our article on startup business loans.
| Funding Type | Best For |
|---|---|
| Small Business Administration (SBA) Loan | Businesses with good credit and finances |
| Rollover for Business Startups (ROBS) | Business owners who want tax- and penalty-free access to personal retirement accounts |
| Business Acquisition Loan | Borrowers with low credit scores |
| Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC) | Borrowers with at least 20% home equity and good personal credit |
| Seller Financing | Sellers willing to finance part of the purchase |
| Small Business Line of Credit | Borrowers who intend to paying off the loan quickly or cover short-term expenses |
| Typical Rates & Terms | |
|---|---|
| Loan Amount | Up to $5.5 million |
| Interest Rate | As low as 6% |
| Repayment Term | Up to 25 years |
| Repayment Schedule | Monthly |
| Funding Speed | 1 to 3 months |
| Typical Qualification Requirements | |
| Credit Score | 680; may vary by lender |
| Time in Business | Varies by program and lender |
| Annual Revenue | Varies |
| Debt Service Coverage Ratio (DSCR) | 1.25x recommended; may vary by lender |
| Down Payment | 10% |
The Small Business Administration (SBA) offers various loan programs that can provide financing to small businesses for a wide variety of uses. SBA loans are government-backed and issued by participating lenders. They typically require you to have good credit and a strong financial history.
It can take one to three months to get funding. However, if you’re approved, then you can get some of the most competitive rates in the market. To qualify for an SBA loan, you’ll need to meet requirements in several categories. You must satisfy general SBA loan requirements, a lender’s requirements, and items pertaining to the specific type of SBA loan you’re applying for.
If you’ve decided that an SBA loan is the best choice for you, consider checking out Clarify Capital. It is a broker that can connect you with lenders that offer up to $5 million in funding with APRs as low as 5.75%. You can also get funding in as little as three weeks.
| Typical Rates & Terms | |
|---|---|
| Initial Setup Fee | $1,000 to $5,000 |
| Monthly Maintenance Fee | $100 to $200 |
| Funding Speed | 2 to 4 weeks |
| Typical Qualification Requirements | |
| Minimum Balance in a Qualifying Retirement Account | $50,000 or more |
| Business Tax Structure | Must be a C Corporation |
A rollover for business startups (ROBS) is a way you can access your retirement account balances to use funds for business purposes tax- and penalty-free. This form of financing isn’t actually a loan—since you’ll be using your own personal funds, there are no interest fees or repayment expectations.
With that said, a ROBS does require you to navigate several tax rules and regulations, and doing so incorrectly can result in hefty fines and penalties. As a result, we recommend using the services of a ROBS provider to walk you through the process. ROBS providers often offer a guarantee to cover monetary losses due to issues that come from an audit. Many also provide legal support and audit protection.
If you think you may want to utilize this as a source of funding for a business acquisition, you can use the services of a provider like Guidant Financial. It offers some of the industry’s best legal and audit support services to help you meet the initial and ongoing requirements to maintain your ROBS compliance.
| Typical Rates & Terms | |
|---|---|
| Loan Amount | Up to $5 million+ |
| Interest Rate | As low as 6% |
| Repayment Term | Up to 25 years |
| Repayment Schedule | Monthly |
| Funding Speed | 2 to 3 weeks |
| Typical Qualification Requirements | |
| Credit Score | 600+ |
| Time in Business | 12 months |
| Annual Revenue | $100,000 |
| Down Payment | 10% or more |
Some lenders offer a specific type of loan for business acquisitions. This is often in the form of a term loan, where funds are disbursed in a single lump sum. Depending on the lender you choose, funds can be used to purchase the business and to cover certain other expenses that may not be incurred until after the deal is closed.
Since acquisition loan offerings can look different depending on your needs, requirements to get a business acquisition loan can vary depending on the lender you choose. That said, there are lenders willing to work with startups and companies with bad credit.
Lendio—one of our leading business loans for bad credit, specifically for business acquisition loans—is a loan broker that issues loans to businesses with credit scores as low as 600. It can also work with startups, as it requires just six months in business.
| Typical Rates & Terms | |
|---|---|
| Loan Amount | Up to $500,000+ |
| Interest Rate | 8% and up |
| Repayment Term | 15 years |
| Repayment Schedule | Monthly |
| Funding Speed | 2 to 4 weeks |
| Typical Qualification Requirements | |
| Credit Score | 620+ |
| Debt-to-Income (DTI) Ratio | 45% |
| Maximum Combined Loan-to-Value (CLTV) | 80% |
A home equity loan (HEL) and a home equity line of credit (HELOC) are loans that are secured by your personal residence. With a HEL, you’ll be given a single lump sum of funds. It’s a good choice if you do not anticipate any recurring needs for more funding, and interest rates are typically fixed for the duration of the loan.
On the other hand, a HELOC is a revolving credit facility that allows you to request a draw, have the funds deposited into your account of choice, and make purchases on an as-needed basis. The balance can be repaid over time depending on how much you’ve accrued, and you’re able to draw additional funds up to your credit limit. However, interest rates are typically variable, so your monthly payment amounts can fluctuate throughout the year.
Our related resources:
To qualify for a HEL or HELOC, lenders will look at your credit score and personal financials, debt-to-income (DTI) ratio, and combined loan-to-value (CLTV). These ratios are used to calculate your financial well-being, and are detailed below:
- The DTI is a ratio of your monthly debt payments in relation to your gross monthly income. Our guide to DTI covers how to calculate it, why it’s important, and more.
- CLTV looks at how much equity you have in your home by taking your mortgage loan and dividing it by the value of the property. Check out our article on the LTV ratio for more information.
If you’re considering getting a HEL or HELOC, we recommend LendingTree. It offers a tool that allows you to compare rates from multiple lenders so that you can choose the best one for your unique circumstances.
| Typical Rates & Terms | |
|---|---|
| Loan Amount | Varies |
| Interest Rate | Varies |
| Repayment Term | Varies |
| Repayment Schedule | Varies |
| Typical Qualification Requirements | |
| Credit Score | Varies |
| Time in Business | Varies |
| Annual Revenue | Varies |
| Down Payment | 15% or more |
Seller financing occurs when the seller of the business agrees to finance a portion of the buyer’s purchase price. Since this is entirely up to the seller, the typical rates, terms, and qualification requirements can vary significantly.
Seller financing is not always available but can be beneficial to both buyers and sellers. With it, the seller retains a percentage of ownership and is therefore invested in the success of the new owner. For the buyer, rates and terms can also be negotiated and may be more competitive than what banks can offer. Buyers having difficulty qualifying for a traditional bank loan may also want to consider seller financing as a funding alternative.
| Typical Rates & Terms | |
|---|---|
| Loan Amount | $250,000-plus |
| Interest Rate | 10% and up |
| Repayment Term | 2 years |
| Repayment Schedule | Weekly or monthly |
| Typical Qualification Requirements | |
| Credit Score | 600-plus |
| Time in Business | 12 months |
| Annual Revenue | $120,000 |
A small business line of credit is a revolving credit facility that can allow you to draw funds and make business purchases on an as-needed basis. Due to its flexibility, it’s a solid financing option for covering business expenses, including covering emergencies, gaps in cash flow, or other unplanned expenses. It can also have more flexible qualification requirements, and many lenders cater to startups, businesses with low revenue, and companies with bad credit.
One downside, though, is that the repayment terms tend to be short, anywhere from 12 to 24 months. This makes a small business line of credit more ideal for covering short-term expenses.
We recommend checking out Bluevine, as it was selected as the best overall lender on our list of the best small business lines of credit. You can get up to $250,000 in funding, low starting rates, and funding speeds as quick as 24 hours.
Step 5: Choose a Lender, Apply & Get Approved
Once you’ve considered your options and identified the type of loan that might be a good fit for you, the next step is to select a lender. You’ll have different options, including banks, credit unions, online lenders, and brokers. Each has pros and cons, and we recommend getting quotes from multiple companies to ensure you get the best rates and terms available.
Banks can offer a wide variety of loan programs that other lenders may not have. One potential downside is that qualification requirements tend to be strict, with little to no room for exceptions. You can see our roundup of the best business banks to find a provider that meets your company’s needs.
In choosing a lender, you should consider the following items:
- Rates and fees charged
- Loan offerings
- Qualification requirements
- Loan terms, such as monthly payment and interest rate
- Funding speed
- Branch locations and customer service hours
- Customer reviews and ratings
- Experience with your industry and type of loan
Before applying for any loan, check out our guide on
how to get a small business loan
for tips on what you can do to improve your odds of getting approved at the best possible rates.
Step 6: Sign a Letter of Intent & Conduct a Final Due Diligence Review
After you’ve applied with a lender and received at least an initial pre-approval for the loan, you’ll need to sign a letter of intent (LOI) showing the seller the expected terms of the purchase. This may include the:
- Final purchase price
- Type of financing
- Expected closing dates
- Outstanding conditions
Your pre-approval letter should also accompany the LOI so that the seller knows whether you are likely to get the funding needed for the purchase.
Step 7: Sign the Purchase Agreement & Get Funds Disbursed
Once you and the seller have agreed to the final terms of the purchase, you can sign documents to finalize the sale. Your lender will then disburse the funds and you’ll begin repayment according to the terms in your loan agreement.
Frequently Asked Questions (FAQs)
It depends on the type of loan that you get. For example, SBA loan programs are generally limited to $5.5 million, whereas a term loan can range vastly and offer anywhere from hundreds of thousands, to millions. Your business needs and qualifications will also play a large role in how much you can borrow.
The difficulty of getting a business loan varies depending on the loan type and lender requirements. Common requirements will involve a review of your credit and finances, but the specific requirements will vary depending on the lender and type of loan. However, it’s recommended to have a down payment of at least 10%, a credit score of at least 600, and a time in business of at least two years.
Common options are SBA loans, term loans, and a ROBS. However, funds from other types of loans can also be used if the terms and conditions do not prohibit its use for a business acquisition. Generally, you can get these forms of financing from banks, credit unions, online lenders, or loan brokers.
Bottom Line
Now that you know the steps of how to get a loan to buy a business, you can implement them to determine what loan type is best for you. Depending on how you choose to finance your business acquisition, you should shop around with multiple lenders before committing to an agreement to ensure you meet qualifications and work with a lender that understands your specific business circumstances.
