There are many compelling reasons why you might consider buying an existing business. Whether you’re buying a company to further grow your current operations or simply taking over an enterprise that already has a track record of success, it can open up future possibilities.
However, purchasing an existing business is not typically an inexpensive endeavor and may require taking out a loan to cover the costs. Financing the acquisition of a business can be challenging, especially if you’ve never had to do it before. Here are key things to consider when thinking about taking out a loan to buy a business and how to get one.
Considerations before you begin
Before you begin the process of applying for a business acquisition loan, there are multiple considerations you should think about. You should ask yourself the following questions and know the answers:
- Why are you trying to buy this business?
- What is the state of the business you want to purchase?
- How much are you willing to spend to acquire the enterprise?
- What business financing is currently available to you?
- Will taking on the loan debt hurt your future credit?
- Will the current owner be able to act as an advisor after the purchase?
- Would you better off applying to start a franchise, which can also provide a successful path?
What you need to get approved
After you’ve been able to answer all the above questions, now you should prepare for the loan application process by collecting paperwork. Financial institutions will scrutinize both your finances and the finances of the business you want to buy, so it’s best to take the time to get all the relevant documents before engaging with lenders.
When it comes to your accounts, institutions will ask about things including:
- Credit history
- Tax returns
- Collateral
- Industry experience
Regarding the existing business you want to purchase, the financial institution will want to take a close look at the company’s:
- Balance sheet
- Annual revenue
- Financial projections
- Cash flow
- Tax returns
- Time in operation
When you receive offers from lenders, you’ll want to closely compare interest rates, fees and other terms.
Apply for a loan
Now that you know what to expect, it’s time to apply for the loan. There are many financial institutions you can go to, but the first place you should consider submitting an application to is any bank or credit union with which you have an existing relationship. Representatives from those banks should have your financial information and if you’ve taken a loan out with that firm before, it may be easier to get additional financing from it.
If you’re starting from scratch, one of the best places to start your search is the Small Business Administration (SBA). The SBA provides small business assistance in many ways, including helping them get funding that would allow an owner to buy another business. Businesses would be smart to apply for a loan using the 7(a) loan program, which is the SBA’s primary vehicle to support large and small loans to businesses.
To get started in your search for an SBA-backed lender, use the SBA’s online Lender Match tool. Using this tool, you’ll detail your needs for the loan (in this case, using the loan to acquire a business) and then you can get paired with potential banks in as little as two days. When you receive offers from lenders, you’ll want to closely compare interest rates, fees and other terms. After deciding which one fits your needs best, then fill out the remaining required paperwork to finish applying for the loan.
Outside of using SBA Lender Match, there are numerous private lenders you can apply directly to that can provide financing. These lenders can walk you through applying for various types of business loans, including traditional term loans, microloans and lines of credit.
Further consultation
As you continue to plan out the purchase of an existing enterprise, it may be best to sit down with financial and business advisors who can fully walk you through the process of taking out a loan and acquiring a company. Places you can seek out this advice include:
- SCORE — This national organization provides free business mentoring with the help of 10,000 volunteers who can share experience in growing businesses and navigating challenges around acquiring existing companies.
- SBA Small Business Development Centers — There are more than 900 centers backed by the SBA where business owners or potential business owners can get advice, including information on loans and acquisitions.
- SBA Women’s Business Centers — There are more than 150 centers focused on helping women business owners navigate challenges, including how to manage the loan process.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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