If you’re looking to acquire an existing business, it’s possible to get a loan to do so. Allowable uses can vary by lender but, typically, you’ll be allowed to use loan proceeds for the initial business acquisition and to supplement cash flow for a short period following the purchase. 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.
To help make the most of your funding, you should make an appropriate offer for the business. Guidant Financial is a provider with business valuation services to help you avoid overpaying for a company. It also offers leases, loans, and other funding options to help your business get started.
Step 1: Gather Required Documents
To start the process of how to get a loan to buy a business, you’ll need a variety of documents to present to both a lender and the business you’re looking to acquire. The exact list of required items can vary depending on the business owner and the lender. However, there are many commonly requested items that will apply to most situations.
Gathering these items ahead of time can save you time and money by allowing you to complete negotiations faster, get funding more quickly, and close the purchase on a faster timeline. Some of these items can also take time to prepare or obtain, so it can be important to request these as early as possible.
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 Owners
One of the first steps in acquiring a company is contacting the business owner or owners to express interest in purchasing the business. In most cases, you’ll be asked to sign a nondisclosure agreement (NDA), as you’ll be privy 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 about 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: Choose the Right Type of Financing
You can use different types of loans to fund the acquisition of another business. 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.
Below are some options you can choose from, each with its own advantages and disadvantages. 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) | 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 5% |
Repayment Term | Up to 25 years |
Repayment Schedule | Monthly |
Funding Speed | 1 to 3 months |
Typical Qualification Requirements | |
Credit Score | 680 |
Time in Business | 2 years |
Annual Revenue | Varies |
Debt Service Coverage Ratio (DSCR) | 1.25x |
Down Payment | 10% |
SBA loans are issued by private lenders but are guaranteed and backed by the government. These loans typically require you to have good credit and finances. It can also 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 requirements that apply to all SBA loans, a lender’s requirements, and items pertaining to the specific type of SBA loan you’re applying for. To learn more about eligibility criteria, head over to our guide on SBA loan requirements.
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 rates as low as 5.75%. You can also get funding in as little as three weeks.
Typical Rates & Terms | |
Initial Setup Fee | $3,000 to $5,000 |
Monthly Maintenance Fee | $0 to $150 |
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 (C-corp) |
A ROBS is a way you can access your retirement account balances tax- and penalty-free—as long as you use the funds for business purposes. Since you’ll be using your own funds, this is not a loan and carries no interest fees.
With that said, a ROBS does require you to navigate a number of tax rules and regulations, and doing a ROBS 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 because of issues that come from an audit. Many also provide legal support and audit protection.
Check out our guide on how a ROBS works to help you decide if it’s right for you. 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-plus |
Interest Rate | As low as 5.5% |
Repayment Term | Up to 25 years |
Repayment Schedule | Monthly |
Funding Speed | 2 to 3 weeks |
Typical Qualification Requirements | |
Credit Score | 600-plus |
Time in Business | 12 months |
Annual Revenue | $100,000 |
Down Payment | 10% or more |
Some lenders offer a specific type of loan for a business acquisition. 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.
Requirements to get a business acquisition loan can vary depending on the lender you choose, but you should be able to find providers 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 one company 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-plus |
Interest Rate | 6.5% and up |
Repayment Term | 15 years |
Repayment Schedule | Monthly |
Funding Speed | 2 to 4 weeks |
Typical Qualification Requirements | |
Credit Score | 620-plus |
Debt-to-Income (DTI) Ratio | 45% |
Maximum Combined Loan-to-Value (CLTV) | 80% |
A HEL and a 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.
Meanwhile, a HELOC is a revolving line of credit. It has more flexibility than a HEL because it allows you to draw funds on an as-needed basis. Payments are based on your balance, and as you pay down the loan, you’ll be 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.
To qualify for a HEL or HELOC, lenders will look at your credit score, DTI ratio, and CLTV:
- 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, LendingTree is a company we recommend. 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 |
With a small business line of credit, you can draw funds when you need. This flexibility makes it a good choice to cover emergencies or other unexpected expenses. This loan can also be easy to get, as many providers cater to startups, businesses with low revenue, and companies with bad credit. Funds drawn can also usually be used for any business purpose.
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 line of credit providers. You can get up to $250,000 in funding, rates as low as 6.2%, 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.
This step in our guide can be done at the same time as the next two steps we cover. To prevent any delays, you should provide the lender with any requested documents as soon as possible to get full approval and secure the funds needed for the business acquisition.
In choosing a lender, you should consider the following items:
- Rates and fees charged
- 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
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 preapproval 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 things like the final purchase price, type of financing, expected closing dates, and 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.
At this stage, there may be some back and forth between the seller and buyer as the final terms of the sale are negotiated. The buyer can also conduct final due diligence checks of the business, which may include a review of the business finances, credit, and debt obligations.
As a buyer, it’s important that during this stage, you continue to work with your lender to get a full loan approval to prevent delays in closing the deal.
Step 7: Sign the Purchase Agreement & Get Funds Disbursed
Once all buyers and sellers have agreed to the final terms of the purchase, you can sign documents to finalize the sale. If you don’t already have full loan approval, you should work with your lender to ensure there will not be any delays that could otherwise jeopardize the sale.
Frequently Asked Questions (FAQs)
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.
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 650, and a time in business of at least two years.
Getting a loan to acquire another business can usually be done anywhere from two to three weeks. This will depend on the specific lender you choose, the type of loan you’re applying for, and how long it takes to negotiate the terms of the sale with the business owner.
Bottom Line
Now that you know how to get a loan to buy a business, you can choose from different types of financing options listed above. Depending on the funding source you get, funds can even cover expenses and cash flow shortages after the deal closes. The best option will
