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Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.
Buying a business is different from buying a franchise. Franchises have a set business model that's proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.
How Much Do You Need?
What lenders look at when you want to buy a business
Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.
Your personal credit and experience
Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.
Good credit score: The higher your credit score, the better your chances of approval and the more favorable the loan terms will be. However, there are still loan options for borrowers with bad credit.
Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven't paid off the full amount will be noted.
Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.
Other businesses you’ve owned
Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.
Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.
Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.
The business you want to buy
Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.
Value of the business: Like you, your lender will want to ensure that you're buying a business that has value and that you're paying a fair price.
Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.
Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.
The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:
Personal tax returns.
Personal bank statements.
Financial statements for any of your other businesses.
Letter of intent.
Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:
Business tax returns.
Profit and loss, or P&L, statements.
Business balance sheet.
Proposed bill of sale.
Asking price for inventory, machinery, equipment, furniture and other items included in the sale.
Where to get a loan to buy a business
Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:
Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you'll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.
If borrowers don't qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.
Online business loans
Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.