2019 guide on the best loans to buy a business
There are different ways that investors use to grow their business. The first one is to introduce a new product or service in the market. You can also decide to purchase a larger property and relocate your business. Some also expand inventory stock. Lastly, you can decide to buy an existing business. If this is the path you want to take, how do you ensure that you get the right type of financing for the acquisition? As you may already know, buying an existing business is not a cheap process, and the most complicated part is getting the right type of financing. Traditional lending institutions set very higher standards, making it almost impossible to qualify for a loan to buy a business. This article will help you find the best financing option that can work well for your situation.
Finding the best loan to buy a business
When you want to buy an existing business, there are several things that you first need to consider. Taking out a business loan comes with challenges too. The lender has to go through your credit history, debt burden, available cash and other businesses that are in your name to determine whether you qualify for financing. Besides, you also have to give information about the type of business you intend to purchase. You have to convince the lender that the business is in good standing, and you can afford to pay back the loan on time. This can be challenging to prove and while there are several loan products available to purchase an existing business, some options are far much better than others. Let’s look at a few of these options, including their benefits and drawbacks;
Small Business Administration loans are among the best loan options to buy a business. This is because they have affordable interest rates and flexible repayment terms of up to 25 years. The only drawback of SBA loans is that it is difficult to qualify, and if you are lucky enough to get the loan approved, it can take up to 90 days to access the funds. It is also easier for the loan to be approved if you want to purchase an existing business compared to startups. This is because an existing business can show potential of repaying the loan by considering their track record. Since part of the loan is guaranteed by the government, they bear low risk for the lender, making the loan program very accessible. It can be a good option for buyers who do not have enough collateral to acquire a traditional loan.
Roll Over for Business Startups, ROBS
This is a financing solution where investors can purchase a business using their retirement savings without tax penalties or early withdrawal fees. Besides, you can have the funds in as soon as 3 weeks if you seek the services of a reputable ROBS provider. This is way faster compared to traditional loans that can take several weeks to be approved. Since this is not a loan, the lender does not require any future payments. Remember that purchasing an existing business is time sensitive and if you happen to delay, another buyer may come in and you may lose out on such an important opportunity. In this case, ROBS can be a good financing option since you can have the funds within a few weeks compared to other financing options that require several weeks of waiting.
With this option, the business seller agrees to fund a portion of the purchase price. Some sellers do not offer this option due to worries that the buyer may not pay the money back. However, seller financing can be of great benefit to both the business buyer and seller. First, it helps attract potential buyers, and the seller may increase the purchase price to benefit more from the deal. Buyers who do not qualify for other funding options can also benefit from seller financing.
Home equity line of credit
If you are willing to issue your personal home as collateral for a loan, then you can consider a home equity line of credit, HELOC. With this option, you can access funds up to 85% of your home value. HELOC can be used for a variety of purposes, which includes buying a business. But before you consider this option, you also should remember that failure to repay what you borrow can cost your home. To qualify for a home equity line of credit, your debt to income ratio should be less than 40 and you should also have a high credit score of 620+.
Friends and family financing
The people you are close to can also be a source of funding for your investment. One benefit of getting a business acquisition loan from this group of people is that you will be charged a lower rate of interest than other sources of financing. There is no paperwork involved and they can also advise you on the best business to invest in. But it is also important to keep the relationship professional by ensuring that the money is paid back.
Steps to finding the best loan to buy a business
- Know what lenders are looking for
The first step to have your loan to buy a business approved is knowing if you qualify for funding. Lenders have different requirements and to increase your chances of getting approved, it is important to ensure that all these requirements are met. Acquiring a business may be risky and since lenders are offering a large sum of money, they will take time to check the details of the business and whether you have personal management skills. Most of the lenders will consider your business and personal credit scores, cash flow, balance sheet and collateral, business plan and your related experience.
- Know the loan options available
The next step is to find a loan option that you qualify for. Traditional banks are known to provide business acquisition loans with affordable rates of interest, but the tight requirements and lots of documentation required can make it almost impossible for business owners to access the funds. So if you are not lucky enough to qualify for a traditional loan, the above loan options, which includes ROBS, home equity line of credit, seller financing and funding from friends and family can be a good alternative.
- Applying for the loan
This is an important step in getting a loan to buy a business. Even before applying for the loan, it is important to first compare your options to ensure that you are working with a reputable lender who offers the best rates and terms. Get prepared by gathering all the required documents, and ensure that the information is complete before submitting your application.
If you want to get a loan to buy an existing, be prepared for a significant amount of paperwork. Among these items include financial information and your purchase agreement. Ensure that documents are organized to be easily accessible in case the lender requires clarifications. The amount of paperwork depends on the type of business you want to purchase. Among the documents that the lender is likely to ask include:
- Business and personal tax returns
- Purchase contract
- Outstanding business debt information
- One year balance sheet and profit and loss statement
- Business licenses
- List of business assets
Finding the right business to buy
For you to ensure that you are putting the money in a profitable venture, it is important to incorporate the services of business brokers. Business brokers understand the market better, know the expected prices ranges and the available inventory. You only have to give the broker an idea of what you want and the price range to help save on time and effort that it will take if you happen to find the best venture on your own.
The bottom line
If you want to find a loan to buy a business, there are several options available for you. In the end, it requires careful planning and analysis to ensure that you get the best loan product. SBA loans are among the best options available, but you should also be prepared for the lengthy paperwork process and the long period of waiting for approval. Since SBA loans also require a down payment, ROBS can be a good alternative. This is because it only takes a few weeks to receive the funds. You can consider a home equity line of credit if you are ready to put up your personal home as a guarantee of payment. With seller financing, you can easily get funds for purchasing an existing business if you do not qualify for other loan options and lastly, friends and family can be a good source of funding due to the low interest rate charged and they also do not have tight requirements. Just ensure to keep the relationship professional and pay the money back as soon as you can to maintain a good relationship.