How to Find Loans to Buy a Business?
If you plan to expand your business or acquire another one, you get yourself in such an overwhelming situation as you need funds to accomplish your plan. Banks have set high standards for loan approvals. The good news is that there are other options available in financing and buying a business. If you have no ready cash or additional capital, you need to apply for financing. The amount you get from a business loan depends on the state of your business and the kind of business you are buying with the rate depending on your qualifications.
These are the three most important things to show a lender when applying for a loan to buy a business.
- Key # 1 – Management
To a great extent, your management skills will determine your ability to earn adequate cash flow for loan payment. Your past history in business is an indicator for your lender to know that you can successfully run a business and make money.
- Key # 2 – Cash Flow/Profitability
This refers to the power of the business to produce enough cash to redeem the principal together with the interest, and still save an amount of cash for daily business operations.
- Key # 3 – Security
Security to support the safety of the loan is also relevant because if the loan is unpaid, the lender will naturally want the assets of the borrower that is sufficient in value to sell and pay off the balance of the loan.
- Know what the lenders are looking for is the first step in getting a loan, what are the qualifications and what lenders would like to find in your loan application.
- Know your business purchase loan options by buying a business guide on how to get a loan — you should know all available loans are out there to buy a business.
- Applying for small business loans is a serious endeavor, it is important that you fully compare your options. This way, you will if the lender is offering you the best interest rates and specific terms
Finding Loans to Buy a Business
- SBA Loans
The best place to start your search for loans in purchasing an existing business is the Small Business Administration (SBA).Issued by banks, SBA loan is considered technically a loan issued but its guarantor is the Small Business Administration so as the business owner, your loan is long-term with low-rate. But SBA loans, unlike traditional bank loans, are easier to qualify and have minimal requirements. SBA is a guarantor for the large portion of the loan amount to a purchase price of a business, lending you the money has a lesser risk so banks will more likely approve your application.Two programs offered by SBA suitable for business acquisition loans are:
- The CDC/504 loan program is meant for purchases of major fixed asset encompasses acquisition for business. It’s a very specific type of financing, and the qualification process is very hard.
- 7(a) loan is a common and more traditional option for SBA financing option; of the two, it is appropriate for smaller business.
- Seller Financing
In seller financing, financing does not come from the bank or third party lender, your loan to buy another business comes from the business seller itself. The seller in this type of loan participates as part in the price of business purchase paying in cash and the remainder is paid in the form of a promissory note that is paid with interest from the buyer for a time period usually from 3 to 5 years.Traditional commercial lending and seller financing are often used in conjunction with each other. With due diligence, promissory notes from borrowers result in lesser risk to the lender, so that another lender might work with the given borrower.
- Alternative Lenders
Lenders that are not banks operate primarily online offering term loans that can be applied for business acquisitions.You could have enough capital to make the business purchase from a medium-term loan. The amount can go up to about $1 million payable over a term from 1 to 5 years. Alternative lenders have medium-term loans to offer that are easier to qualify for than SBA and bank loans. It is a good choice for business owners who do not have a good personal credit score, business financials, and business experience.
- Rollover for Business Startups (ROBS)
ROBS utilizes your retirement savings to serve as your business acquisition loan; you do not need to pay taxes or fee for early withdrawal; plus funds are out within 2-3 weeks. The money is released 4xs as fast as the usual bank loan. Inasmuch as ROBS is not considered a loan; no future payments are required from a lender.
- Home-Equity-Line-of-Credit (HELOC or HEL)
Other good options are Home-equity-line-of-credit (HELOC) and home-equity-Loans (HEL) if your personal home will be the collateral to the type of business you’re buying. Both HELOC and HEL are similar because they use the equity in your home for financing, but receiving the money differs. With a HELOC, you draw against your credit line until you hit your limit but you only pay interest on what you borrow. A HEL is a loan paid at one-time after you receive all of the funds up front and pay interest on all of it via amortized monthly payments.
- Get financing from family and friends
A common business arrangement is borrowing money to buy a business from family and friends. If you buy a currently operating business, it will likely cost more money; however, you can raise working capital from the people you’re closest to, and it could be a practical resource for your needed capital stock. If you’re going to borrow money from friends and family, have all loan transaction in writing and make payments on the borrowed money like you would with any other bank loan.
The process to find a loan to buy a business can be challenging, but it’s certainly possible. Just be thorough and consider all available options.