Buying a business is a big undertaking, and getting a loan to buy a business can be the most complicated part. Banks set high standards that both you and the business have to meet before you’re approved. We’ll show you how to get the loan to buy a business that’s best for your personal situation.
A Rollover for Business Startups (ROBS) lets you use retirement savings (from a 401(k) or IRA) to buy a business. You can use the funds for an SBA loan down payment, in conjunction with seller financing, or to cover 100 percent of your purchase. Guidant Financial is our recommended ROBS provider. Schedule a free, no-obligation consultation with Guidant to learn more.
Getting a Loan to Buy a Business Options
|Funding Type||Good For|
|SBA Loans||Prime borrowers looking for the longest repayment terms and lowest interest rates.|
|Rollover for Business Startups (ROBS)||Funding a purchase or loan down payment for borrowers with $50K+ in retirement funds.|
|Seller Financing||Encouraging the seller to help your business succeed and used in combination with other financing.|
|HELOC & HEL||Borrowers who have 20%+ equity in their homes and relatively good credit (620+).|
|Family & Friends Loan||Borrowers who have wealthy friends or family who believe in their businesses and will invest.|
The best loan to buy an existing business for most people is an SBA loan. This is because the interest rates on SBA loans are some of the best, plus you can get some of the longest repayment terms (10 to 25 years). Because SBA loans are generally the best option (except for high net worth individuals who have more options), we’ll primarily focus on SBA lending.
Here are the five most common loans to buy a business:
1. SBA Loans to Buy a Business
Out of almost all forms of financing, SBA loans have the most competitive interest rates and longest repayment terms. However, the downside of working with an SBA lender is that it can be difficult to qualify, and even if you do, the process can take 45 to 90 days or longer.
It’s typically easier to get approved for SBA financing to buy an existing business compared to getting approved for startup financing. This is because the lender is able to better judge the existing business’ potential to repay a loan by looking at its track record, rather than pinning their hopes on a startup’s projections alone.
Most traditional lenders who offer multiple types of loans will often consider you first for an SBA loan because these loans are partially guaranteed by the U.S. Small Business Administration (SBA). It’s a safer bet for the lender, and if you don’t have enough collateral to secure a traditional bank loan, it could give you a better chance at getting approved.
SBA Loan Rates, Costs, & Terms
An SBA loan will typically carry similar terms and qualifications as a traditional bank loan. The lender is generally looking for prime borrowers (680+ credit score) with a strong business plan. It may also require some collateral to get approved. Understanding the rates, costs, and terms you can expect to pay will help you to make an informed financing decision.
SBA loans to buy a business typically carry the following rates, fees, and repayment terms:
Loan Amounts & Down Payment
SBA loans to buy a business feature loan amounts and down payments of:
- Loan Amount: Up to $5,000,000
- Down Payment: ~10% – 20% of the amount you need
SBA loans to buy a business carry interest rates that vary based on the current U.S. prime rate. They are typically around 6 percent to 9 percent, but you can check out our article for the current SBA loan rates.
SBA loans to buy a business have a guarantee fee, typically starting at 3 percent of the loan amount. There may also be other fees associated with an SBA loan to buy an existing business, such as application fees, third-party closing costs, or prepayment fees.
SBA loans to buy a business feature terms that vary depending on the type of business and what is being purchased. You’ll get shorter terms for working capital (five to 10 years is typical) and longer terms for real estate (up to 25 years is likely). The term you are given is typically tied to how long the collateral is expected to last (e.g., a longer useful life equals a longer term).
The maximum terms for SBA 7(a) loans to buy an existing business are:
- Inventory or Working Capital: Up to 10 years
- Equipment, Fixtures, or Furniture: Greater of 10 years or the useful life of the collateral, not to exceed 25 years
- Commercial Real Estate: Up to 25 years
Keep in mind that a longer term means lower monthly payments and better cash flow, but it also means that you are paying interest for a longer period of time. This could increase your total cost of capital if you repay the loan over the full term instead of getting a shorter-term loan that you pay off quicker.
How to Qualify for an SBA Loan to Buy a Business
The SBA looks at a lot of information when determining whether or not you’re qualified for a loan, but there are five qualifications that primarily determine whether or not you get approved. These include your personal credit score, down payment, collateral, industry experience, and the financial strength of the business you’re purchasing.
More details about the five qualifications for SBA loans to buy a business are:
Personal Credit Score
SBA loans to buy a business generally require a credit score of 680+ (check your credit score for free). If your score is lower than 680, obtaining an SBA loan will be very difficult. If this is you, we recommend speaking with someone about how you can improve it. To do that, you can read our complete guide on the best credit repair companies.
SBA loans to buy a business typically require you to put some of your personal cash towards the purchase of the business. Without some skin in the game, a lender is unlikely to give you an SBA loan. Every deal is different, but most lenders expect at least 10 percent to 20 percent from the borrower, and may require as much as 30 percent down.
One popular way of coming up with a down payment is to use money you’ve saved in a tax deferred retirement account, and a ROBS lets you do just that without paying withdrawal penalties or taxes. You can qualify if you have at least $50,000 in a tax deferred retirement account. We recommend working with a ROBS professional, like Guidant, to help you through the process.
SBA loans to buy a business, even if the business you’re looking to buy is highly profitable, typically require you to provide some collateral. The reason is that no matter how well a business has historically performed, there is always a chance that it can fail. Sufficient collateral provides security in case the business goes belly up and you can’t pay back the loan.
When getting a loan to buy a business, some factors to consider about collateral include:
- Real estate collateral is the most attractive: Real estate, whether business or personal, is the most attractive form of collateral because it is the most likely type of collateral to retain its value.
- Other collateral may be acceptable: You may also be able to pledge equipment, vehicles, accounts receivable, and other business or personal assets as collateral.
- Value of your collateral is discounted: Lenders typically discount the value of the collateral you pledge to cover the potential costs of liquidating your assets and to account for any depreciation.
SBA loans to buy a business require you to have three to five years of direct industry experience at a managerial level or higher. Less than that will raise serious doubts that you will need to overcome if you’re going to get the financing you need. If you don’t have that experience, then you’ll need to identify and hire a management team who has it.
If you don’t have much experience, one way to address that is with a solid three to five year business plan, complete with financial projections. To simplify this process, there’s easy to use business planning software out there that helps you cover all your bases. With the right software, you can end up with a great business plan even if you don’t have any tech or design skills.
Financially Strong Business
SBA loans to buy an existing business are easier to get than if you are launching your own startup company. This is because the existing business has a financial track record, which makes assessing the likelihood the business will be able to repay the loan much easier.
When evaluating if your business is financially strong, the SBA prefers:
- Operational History: The minimum time in business typically required is two to five years.
- Demonstrated Profitability: The financials need to show that the business is profitable.
- Growing or Stable Revenues: The business revenues need to be stable or growing.
- Ability to Repay: If the business is not profitable or has declining revenues, the lender will likely be skeptical about the ability of the business to repay. To show ability to repay, the business should generally have a debt service coverage ratio of at least 1.25x.
If the business you’re looking to buy is profitable, you have a 20 percent cash down payment, and a credit score above 680 (check your score for free), you may qualify for an SBA 7(a) loan for a business purchase with South End Capital. They provide long-term SBA 7(a) loans of up to $5 million and offer a free consultation to help you get started.
SBA Loan Application and Documents
When applying for a loan to buy a business, you will be asked to submit financial and other documents for the business. Your lender evaluates these documents to determine if you and the business and creditworthy. You can speed up the loan process by providing your lender with all the paperwork upfront. You can get our free SBA loan document checklist to make this easier.
SBA loans to buy a business require you to submit documents such as:
SBA loans to buy a business require a purchase agreement that details:
- The final purchase price of the business
- What is being bought (stock or asset sale)
- What is required by the seller and buyer at closing
- Effective date that ownership of the business is transferred
- If seller will help with transition (and terms)
- Responsibility for existing liabilities
The lender needs the purchase agreement to verify the business’ purchase price and learn more details about the business, including whether some of what is being purchased can be considered collateral.
Before the purchase agreement, there may also be a Letter of Intent (LOI). This is less formal than the purchase agreement and sets out the preliminary framework for the business purchase. Many lenders use this document to get their preliminary underwriting started, but they won’t fund without an executed purchase agreement.
Financial Documents for the Business
SBA loans to buy a business require a variety of documents that the lender will need in order to evaluate the business’ financial condition. You should already have these in your possession from the due diligence process. Make sure to keep these documents accessible and well-organized after you submit copies to your lender in case they have questions.
The financial documents required for an SBA loan to buy a business include such things as:
- Last three years business and personal tax returns
- Year-to-date profit and loss, balance sheets, and cash flow statements
- Information on outstanding business debts
- Information on any long-term contracts
- Complete list of business assets (including year, make, model, mileage/hours)
- Rent rolls if the business has tenants
- Business lease
- Organizational documents for the business (e.g., incorporation documents and business licenses)
- Business plan
To learn more about the SBA loan application process, read our article on how to apply for an SBA loan.
2. Rollover for Business Startups (ROBS)
A ROBS helps you access your retirement savings for financing a business purchase without paying taxes or early withdrawal fees. Plus, the funds are generally available in two to three weeks with the help of a good ROBS provider. That’s more than four times as fast as a typical bank loan. A ROBS is not a loan, so there is no debt and there are no future payments required by a lender.
A ROBS is a good option for financing a business purchase because:
- It’s quick: You can get a ROBS in about two to three weeks, which is quicker than a typical loan to buy an existing business.
- It isn’t a loan: Since a ROBS isn’t a loan, there isn’t any debt you have to repay.
- Your chances of success are improved: A study commissioned by Guidant Financial showed that companies funded by ROBS had a better survival rate. This can be partly attributed to the fact that a ROBS isn’t a loan and so there aren’t any payments.
As noted, buying a business is typically time sensitive. If your acquisition is delayed, the seller may simply decide to go with another buyer and you’ll lose out on the opportunity. This is why many people who could qualify for a bank loan to buy a business choose not to.
If you have at least $50,000 in a 401(k), IRA, 403(b), or another eligible retirement account, you could qualify to work with most ROBS providers. It’s a great way to get the money you need without saddling your business with debt from day one. You’ll simply pay a setup fee at origination and an ongoing management fee.
A ROBS typically costs:
- Setup Fees: ~$5,000 at initiation
- Management Fees: ~$140 per month
A ROBS has a number of requirements during the setup phase, and even after you use it to fund your business. That’s why we recommend working with an experienced ROBS professional so that your business is protected. As an alternative to a ROBS, you can also borrow or cash out money from your 401(k) when financing a business purchase.
Our recommended firm for a ROBS transaction is Guidant. They have helped over 11,000 businesses invest over $3 billion in starting or buying a business. You can sign up today to receive a free consultation to learn more.
3. Seller Financing
Seller financing happens when the owner you’re buying your business from agrees to finance part or all of the purchase price. Sellers open to seller financing will typically finance 15 percent to 60 percent of the purchase price of the business they’re selling. This can help borrowers with less than prime credit profiles gain access to affordable financing they may be unable to get otherwise.
Seller financing is a good option when getting a loan to buy an existing business because:
- Confidence in the business is increased: Seller financing can give you more confidence in the business, since the current owner is willing to invest in your success.
- Interest rates are similar to market rates: The interest rates on seller financing are usually similar to prevailing market rates (an APR of 6 percent to 10 percent) and are fully amortized. These details will vary from deal to deal and are typically a part of early negotiations during the sales process.
- All or some of the purchase costs are covered: Seller financing (or seller carry back) can be used to cover all of a buyer’s purchase or just a portion. If the seller financing will only cover a portion of the acquisition cost, the buyer will often make up the difference with cash, a home equity line of credit (HELOC), or an SBA loan.
There are no specific qualifications for seller financing because each seller will have different requirements. Many sellers will check your credit and will want to see a respectable credit score, but you don’t have to be a prime borrower. If your score is 600+, then it should be enough for many sellers that offer financing (check your score for free).
4. Home Equity Line of Credit (HELOC or HEL)
A home equity line of credit (HELOC) and home equity loan (HEL) might be a good option if you’re willing to put your personal home at risk for the business you’re buying. According to a study by the NFIB, a small business activist, around 25 percent of small business owners have used a home equity line to at least partially fund their business.
While both a HELOC and HEL use the equity in your home for financing, the differences are:
- HELOCs are credit lines: A HELOC is a credit line similar to a credit card that you can draw against until you hit your limit. Further, you only pay interest on what you borrow.
- HELs are one-time loans: You receive all the funds with a HEL up front. Your payments are made monthly, and include interest and principal on the full amount.
To qualify for a HELOC or HEL, you’ll need:
- Home Equity: ~20% – 30% equity in your home
- Acceptable Credit: 620+ credit score (check your score for free)
HELOCs and HELs can be less expensive than even traditional bank or SBA loans, and the only collateral used is the home you’re borrowing against. This is a very flexible form of financing, where you can use the funds for anything you want, including buying a business.
If you’re shopping for a home equity line of credit, you can reach out to one lender at a time hoping you find a good deal. Or, you can save time, shop smart, and find a HELOC that fits from an online marketplace like LendingTree.
5. Buy a Business with Friends & Family Financing
Borrowing from friends and family is very common for new businesses. In fact, according to National Venture Capital Association, around 24 percent of all startups get a private loan from either family members or close friends. This makes using financing from friends and family a good option when searching for a loan to buy a business.
Important considerations when buying a business with financing from family and friends are:
- You might also need other financing: Buying a business that’s currently in operation may cost more than you can raise from your friends and family. However, it could be an excellent resource to get a piece of the capital stack. Plus, you can pair financing from family and friends with some of the other options we reviewed.
- Formally document the loan: The transaction should be in writing and you should make payments on the money you borrow like you would with any other loan.
- Don’t mix personal and business funds: You should never commingle (or mix) personal and business funds. There’s no reason to make this mistake when opening a business checking account is so easy. Check out our recommended business checking accounts.
Financing Options to Buy a Business Pros & Cons
When getting a loan to buy a business, there will always be pros and cons, and the options we’ve presented won’t work for every business. So, it may very well be that the pros of a particular option outweigh the cons, since it’s your only available tool for financing a business purchase. Evaluating the pros and cons will enable you to make a good and informed financing decision.
The pros and cons for each of our top five loans to buy an existing business are:
SBA Loans to Buy a Business Pros & Cons
On the positive side, SBA loans feature low interest rates, long repayment terms, and down payments as low as 10 percent. The cons include the fact that you need to pay a guarantee fee, there’s more paperwork (meaning it’s slower), and qualifying is more difficult.
The pros and cons associated with using an SBA loan for financing a business purchase are:
Pros of Financing a Business Purchase with an SBA Loan
The pros of using an SBA loan to buy an existing business are:
- Low Interest Rates: You’ll get some of the best interest rates by choosing an SBA loan. This makes SBA loans great for long-term working capital needs. The SBA loan rates are typically around 6 percent to 9 percent.
- Long Repayment Terms: Depending upon the underlying collateral and loan purpose, you can get from 10 years (working capital) to 25 years (commercial real estate) to pay.
- Low Down Payment: Your down payment could be as low as 10 percent. While in some cases you’ll need to put down more money (up to 20 percent or 30 percent), the minimum amount is lower than what you’ll get from a traditional bank, where 20 percent to 30 percent is the norm.
Cons of Financing a Business Purchase with an SBA Loan
The cons of using an SBA loan to buy an existing business are:
- Extensive Paperwork and Slow Process: The amount of paperwork you need to provide for an SBA loan is extensive. This contributes to a slow process. It could take you up to two or three months to get funding.
- Harder to Qualify: The qualifications for an SBA loan are much harder than some other financing types. You have the best chance of qualifying if you have a 680+ credit score, a debt service coverage ratio of 1.25x or better, and prior management experience with the type of business you’re purchasing.
- Expensive Fees: There are fees associated with an SBA loan. The most substantial of these is a guarantee fee, which starts at 3 percent of the loan amount for loans over $150,000. You might also be charged a prepayment penalty should you need or want to repay the loan early.
Rollover for Business Startups to Buy a Business Pros & Cons
On the positive side of using a ROBS for financing a business purchase, you won’t have any interest costs nor any taxes or penalties, plus it’s a quick financing option. The cons include the fees associated with a ROBS and the potential risk this type of financing places on your nest egg.
The pros and cons associated with financing a business purchase using a ROBS are:
Pros of Buying a Business Using a ROBS
The pros of using a ROBS for financing a business purchase are:
- No Interest Cost: With a ROBS, you’re borrowing against your own asset, so there’s no interest cost.
- No Taxes or Penalties: You can use a ROBS without needing to pay any taxes, and you won’t be charged any penalties.
- Quick Financing Option: Buying a business with a ROBS is a quick option. You can typically get your funds in two to three weeks, which is up to four times faster than a traditional bank loan.
- Can Be Used in Combination with Other Methods: You have the option of layering a ROBS with the rest of your business purchase financing package. As an example, you could borrow the down payment you need for an SBA loan using a ROBS.
Cons of Buying a Business Using a ROBS
The cons of using a ROBS for financing a business purchase are:
- Associated Fees: While you have no interest cost, there are associated fees. A typical ROBS costs ~$5,000 to setup and ~$140 per month to manage. You’ll need to come up with this money from other sources before accessing the retirement funds you’re rolling over.
- Risk to Your Nest Egg: If you use a ROBS, the funds you’ve saved for retirement are at risk if your business doesn’t succeed. This makes it especially important to carefully evaluate the business opportunity before saying yes.
Seller Financing to Buy a Business Pros & Cons
On the positive side, with seller financing the seller is incentivized to help the business succeed, there are low interest costs, and it’s easier to negotiate your loan terms. The cons include the fact that seller financing isn’t always available and you’ll need multiple funding sources.
The pros and cons associated with using seller financing to buy a business are:
Pros of Getting a Loan to Buy a Business with Seller Financing
The pros of using seller financing to buy a business are:
- Seller Maintains a Business Interest: With seller financing, the seller maintains a significant stake in your business. This can be beneficial, particularly if you’re trying to maintain relationships the seller built.
- Low Interest Rates: The interest rates for seller financing typically equal the prevailing market rates (6 percent to 10 percent APR). This is lower than some of the other financing options on this list.
- Ease of Negotiating Terms: You might have an easier time negotiating your loan terms with seller financing. They’re getting paid both for their business and potential interest on your loan. So, the seller has a big financial incentive to make the transaction work.
- Helps You Qualify for Other Financing: You may not be able to get all the funds you need for financing a business purchase from family and friends. However, you could potentially get a portion of the funds and pair it with one of the other financing options.
Cons of Getting a Loan to Buy a Business with Seller Financing
The cons of using seller financing to buy a business are:
- Not Always Available: Seller financing may not be available for the business you want to purchase. That said, as you start your search, you need to make sure you’re not counting on seller financing and you have a backup loan to buy a business ready.
- Financing from Multiple Sources: Most of the time seller financing will only cover a portion of the purchase price. This means you’ll need to secure multiple types of financing, such as from the seller and a traditional bank. This adds both complexity and potentially time to the purchase transaction. You’ll also need to make two payments.
- Seller May Still Want a Say in the Business: When you use seller financing, the seller maintains a stake in the business. This means the seller may want to have a say in how you’re running the business. Disagreements could make the situation uncomfortable.
Home Equity Credit Line (HELOC or HEL) to Buy a Business Pros & Cons
On the positive side, when getting a loan to buy an existing business using a HELOC or HEL, you’ll get a lower interest rate than most other options along with flexibility in your use of funds. The cons include the fact that your home equity is reduced and your home will be pledged as collateral.
The pros and cons associated with using a HELOC or HEL to buy a business are:
Pros of Financing a Business Purchase with a Home Equity Line of Credit
The pros of getting a loan to buy a business using a HELOC or HEL are:
- Low Interest Rates: The interest rates you’ll pay for a HELOC or HEL are lower than most other options on our list. For a HELOC, you’ll typically pay 2.5 percent to 8 percent, while with a HEL, the interest rate is generally 4 percent to 8 percent.
- Flexibility in Use of Funds: With a HELOC or HEL, you have more flexibility in how you use your funds, since you’re borrowing against a personal asset.
Cons of Financing a Business Purchase with a Home Equity Line of Credit
The cons of getting a loan to buy a business using a HELOC or HEL are:
- Reduces Equity in Your Home: Any funds you advance on your HELOC or HEL reduce your home equity. While it’s a relatively easy source of financing, you should make sure you have plans for how you’ll replenish your home equity in the future.
- Your Home Is at Risk: You’re putting your home on the line when getting a loan to buy a business using a HELOC or HEL. If for whatever reason you can’t repay the loan, you not only risk losing your business, but also your home.
Friends & Family Financing to Buy a Business Pros & Cons
On the positive side, a loan to buy an existing business from family and friends is convenient and inexpensive, plus your lender is typically flexible. The cons include potential personal problems if things go wrong, you need a network of wealthy people to make it work, and potential reporting problems.
The pros and cons associated with financing a business purchase with family and friends are:
Pros of Using Friends & Family for a Loan to Buy an Existing Business
The pros of getting a loan to buy a business from family and friends are:
- Convenience: Borrowing from friends and family is typically a very convenient option. You’ll likely have very little (if any) paperwork and you can get the funds quickly.
- Inexpensive: Friends and family typically charge very little. As of August 2018, per the IRS, the minimum interest rates on short-term loans (less than three years) was 1.84 percent and 2.23 percent on long-term loans (up to 9 years). You should make sure your friends and family charge you interest so the IRS doesn’t see it as a gift and tax you for it.
- Lender Flexibility: Typically, your friends and family will be very flexible should you run into times of trouble. This can be a great benefit, especially if you’re just starting out.
Cons of Using Friends & Family for a Loan to Buy an Existing Business
The cons of getting a loan to buy a business from family and friends are:
- Potential Personal Problems: While family and friends will typically be very flexible with you in times of trouble, which is a pro, there is an associated con. If your business fails and you can’t repay the loan, it might cause personal problems and tension. To avoid this, it’s important to treat your loan as seriously as you would with a third-party lender.
- You Need a Wealthy Network: This may be obvious, but financing from friends and family is only available to you if those with whom you’re associated are wealthy. If you don’t have a network of wealthy individuals on whom you can call, then this isn’t an option for you.
- Potential Reporting Problems: Although you can typically get a loan from family and friends with little documentation, this can lead to potential reporting problems. A lack of documentation could also make other fundraising difficult, as it just doesn’t look professional.
Timeline for Getting a Loan to Buy a Business
When buying a business, there is generally a timeline that you can expect to follow before you get to closing. It’s important that you make sure your financing timeline fits into the timeline of the overall business closing process and that you have the right documents prepared at the right time.
Here’s the typical small business timeline and process for getting a loan to buy a business:
Initial Inquiry (Time: 1 Week)
To learn about the business opportunity, you’ll typically sign an NDA in order to receive some basic information. Business brokers typically like to receive an indication of interest in buying the business within one week after receiving any preliminary data. At this stage, you should begin the process of researching potential business purchase financing options and lenders.
Data Request (Time: 2-3 Weeks)
If you have a high level of interest in buying the business, then you’ll typically request additional information to help you make a decision. This includes documentation like its historical financial statements. This is a good time to start preparing for your loan to buy a business by gathering the required documentation and reaching out to the lenders you identified in the prior stage.
When getting a loan to buy a business, a calculator for business valuations is helpful. This is because you’ll want to know you’re not paying too much for the business. The value of your business also affects how much you can borrow. Preparing this calculation early may save you time in the long run.
Letter of Intent (Time: 1-2 Weeks)
At this stage, if you want to move forward with the business, you’ll submit a non-binding letter of intent (LOI) with your expected offer. If accepted, this is when the business will want to know how you plan to fund the purchase.
You should get a pre-approval letter from the company you’re using to get your loan to buy a business at this point. This is where the initial negotiations are done on things like purchase price and seller financing.
Full Company Review (Time: 1-2 Months)
Once the LOI has been accepted, you’ll be able to review all available information on the company. This is where you get to decide for sure if you’re going to move forward with buying the business. You should also be setting up your loan to buy the business during this period by working with your lender and submitting all necessary documentation.
Purchase Agreement & Closing (Time: A Few Days to a Few Weeks)
This is where a purchase agreement is negotiated, signed, and closing takes place. At this point, your loan to buy the business should be ready to fund so that you can hit your closing date and not lose the business to an impatient seller.
Documentation Required for a Loan to Buy an Existing Business
Getting a loan to buy a business potentially requires a significant amount of paperwork. This paperwork likely includes such items as your purchase agreement as well as financial information on you and the business you’re buying. As you gather the information, you should organize it in a binder so it’s readily accessible should your lender have any questions.
The amount of documentation required varies based on the type of business purchase financing you choose. An SBA loan will require the most documentation. We’ve put together a free SBA loan documentation checklist to help you gather all the required information.
When getting a loan to buy a business, the documentation you’ll likely need to provide includes:
- Purchase contract for the business
- Business and personal tax returns (prior three years)
- Balance sheet and profit & loss statement (year-to-date)
- Information on outstanding business debts
- Complete list of business assets (including year, make, model, mileage/hours)
- Rent rolls if the business has tenants
- Business lease
- Organizational documents for the business (e.g., articles of incorporation)
- Business licenses
To avoid the documentation altogether, a great option is a ROBS, as little to no paperwork is required. Our recommended firm for a ROBS transaction is Guidant. They have helped over 11,000 businesses invest over $3 billion in starting or buying a business. You can sign up today to receive a free consultation to learn more.
Frequently Asked Questions (FAQs) About Getting a Loan to Buy a Business
This article has provided a lot of information about how to get a loan to buy a business and ways of financing a business purchase. However, some questions are asked more frequently than others, which we’ve tried to address here. If we haven’t answered your question, feel free to share it with us in our forum and we’ll provide an answer.
Here are some of the most frequently asked questions about loans to buy an existing business:
What Types of Business Acquisitions Do Banks Prefer?
Banks prefer certain types of business acquisitions over others. This is because over time, certain businesses and industries have performed better and more consistently than others. Banks like safe businesses where the buyer has a lot of industry experience (three to five years). It’s even better if the business is established, with two to five years of demonstrated profitability.
Some of the types of business acquisitions banks prefer include:
- Day cares
- Professional services (accountants, lawyers, etc.)
- Medical services (doctor, dentist, etc.)
- Partner buyouts
What Types of Business Purchases Do Banks Not Like?
Banks don’t like risky businesses or businesses with small margins. This is because there’s an increased risk of loss to the bank. Banks make decisions regarding what business types are risky by evaluating such things as the industry, their past experience, and potential reputational concerns. For businesses with elevated risk, an alternative lender might be better.
Some examples of businesses banks may consider risky are:
- Vice industries
- Grocery stores
- Hard to explain product based businesses
- Businesses that rely heavily on a single customer
How Do I Also Buy a Business’ Real Estate?
Buying commercial real estate with a business does two things: increases the business assets and collateral and increases the asking price. If your acquisition includes the purchase of real estate, you should consider an SBA 504/CDC loan for that portion of the purchase. SBA 504 loans are typically the cheapest commercial real estate financing option.
What if I Already Own Another Business?
Lenders refer to other businesses you own as “associated businesses.” If you have 20 percent or greater ownership in an associated business, the lender will want to examine the financial health of that business. This is to ensure the associated business doesn’t pose a significant risk to your finances, including the repayment ability of your new loan.
How Do I Find the Right Business to Buy?
Oftentimes, business brokers will be experts in both the buying and selling of a business. Their expertise can be invaluable when it comes to understanding the market, the available inventory, expected price ranges, typical seller financing offered, and much more. When searching for an opportunity to buy a business, it makes sense to start by finding a broker.
By providing your business broker with an idea of what you’re looking for, your price range, and your timeline, you may save yourself a great deal of effort and time. You can also look to get an attorney to represent you in finding a business, network to find opportunities, or reach out to specific businesses you want to target.
What Is a UCC Lien and How Does It Affect Me?
A UCC lien is a public notice that your lender is using all or some of your assets as collateral for your loan. When you get a loan to buy a business, it’s likely that your lender will want your business assets as collateral. Your lender will file a UCC-1 to perfect its interest in your assets.
The reason your lender will likely file a UCC lien on your assets is to make sure any future lender with whom you work is aware of your current lender’s claim on your assets. It doesn’t hurt your business unless you’re trying to get additional financing. You can learn more by reading our guide on UCC liens.
Will I Have to Sign a Personal Guarantee to Buy a Business?
Unless you’re able to pay cash for the business you’re buying, you’ll likely sign a personal guarantee. Personal liability is often hidden behind limited liability companies and other corporations. However, your lender will want access to other assets in case you default. It’s also to make sure you’re fully engaged in the success of the business.
What Options Do I Have if I Don’t Have Enough Cash for a Down Payment?
If you don’t have cash savings available for a down payment, there are other alternative options available to you. Most of these are options we’ve mentioned as alternatives to an SBA loan to buy your business. However, they can also be used as a down payment. One of the best options is a ROBS.
Some potential down payment options you can use for a loan to buy an existing business are:
- ROBS (Rollover for Business Startup): With a ROBS, you can access the funds you need without paying taxes or withdrawal penalties. We recommend using a professional ROBS provider, like Guidant, and only using a ROBS if you have $50,000 or more in your account.
- Cash Out Your IRA or 401(k): Another option is to cash out your retirement accounts. We don’t recommend this option due to the heavy taxes and penalties you’ll have to pay. However, it could get you access to the funds you need for an SBA loan down payment.
- Home Equity Loans and Home Equity Lines of Credit: If you’re a homeowner, you can use a home equity loan (HEL) or a home equity line of credit (HELOC) to come up with a down payment. HELOCs and HELs offer great interest rates and generous terms, but also reduce the equity available and put your personal property at risk.
Bottom Line: How to Get a Loan to Buy a Business
The question of how to get a loan to buy a business has a number of answers. In the end, getting a loan to buy a business requires careful planning and analysis of all your options. SBA loans are a good place to start, but you should expect a lengthy process of document collection and lender review that can last up to 120 days or more.
When considering how to get a loan to buy a business, you can use a ROBS to fund your purchase or as a down payment for an SBA loan. It can give you the flexibility and funds you need within a few weeks. You can set up a free consultation with our recommended ROBS provider, Guidant, today.