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 include an established customer base and an existing cash flow, which can make it easier to get a small-business loan.
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.
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needs of your business.
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Qualifications for a loan 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, known as a business acquisition loan, compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.
Your personal credit
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.
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.
Your business experience
Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.
Industry 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.
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.
Business 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.
Best loans to buy a business
| Product | Max loan amount | Min. credit score | |
|---|---|---|---|
 SBA 7(a) loan with NerdWallet Small Business | $5,000,000 | 650 | with NerdWallet Small Business |
 Bank of America Business Advantage Unsecured Term Loan Nerdwallet Rating with NerdWallet Small Business | $100,000 | 700 | with NerdWallet Small Business |
 OnDeck - Online term loan Nerdwallet Rating with NerdWallet Small Business | $400,000 | 625 | with NerdWallet Small Business |
 iBusiness Funding - Online term loan Nerdwallet Rating with NerdWallet Small Business | $500,000 | 660 | with NerdWallet Small Business |
 National Funding - Online term loan Nerdwallet Rating with NerdWallet Small Business | $500,000 | 600 | with NerdWallet Small Business |
Applying for a loan to buy a business
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.
Personal documents
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.
Business documents
Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:
- Business tax returns.
- Profit and loss (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:
Bank loans
Banks generally offer the lowest interest rates and best terms for business loans. To qualify for a business bank 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.
In addition to business bank loans, you may also be able to get a personal loan for business uses. Similar to business loans though, you will likely need strong credit history and strong personal assets to get approved.
SBA loans
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.
» MORE: Best large business loans
The SBA, online lenders and banks and credit unions may all issue loans to buy a business. Which lender you go with will largely be determined by your qualifications; however, you’ll compare things like interest rates, loan terms, funding speed and loan amounts.
» MORE: Best franchise loans
Other ways to finance buying a business
If a loan isn’t an option for you, there are other ways you can access capital to purchase an existing business.
Seller financing
Depending on the owner of the business you’re trying to purchase, you may be able to request seller financing — an agreement directly with the owner that you can purchase their business and pay them directly in installments.
Venture capital
Venture capital is a form of equity financing that allows you to fund your business without taking on any debt. Instead of a loan, venture capitalists will give you lump sums in exchange for equity, or ownership in the business. Investors may have similar requirements to banks, however, so this option is best for those who can qualify for traditional financing, but want to avoid loans.
Personal financing
Personal funding options, like Rollovers as Business Startups (ROBS), use your personal savings or retirement savings to fund a business. The risk is that you could lose your money if the business fails; however, if you’re confident with the current business operations, personally financing the purchase of a business can be less risky than funding a startup yourself.
