How to Get a Loan to Buy a Small Business

For many aspiring small business owners, buying an existing business can be a great way to jumpstart growth. Having an existing customer base, business infrastructure, and suppliers in place can save you time, money, and energy. Of course, the main issue when it comes to acquiring an established small business is figuring out how to finance such a venture. 

Buying an existing small business can require a significant amount of capital upfront, and many entrepreneurs don't have the cash necessary to buy a business. With that being said, loans are often the next best option, but how do you get approved for one? This guide will outline the steps to maximize your chances of getting approved for a loan to buy an existing small business.

Why Consider Buying an Existing Small Business?

If you're considering entrepreneurship, buying an existing small business may be a wise financial decision. When you take over an established business, you instantly acquire an existing customer base, brand recognition, and a proven revenue stream. 

The proven revenue stream and profitability of an existing business can open the door to capital, which is often one of the most challenging things to qualify for as a new business. An existing business is more likely to receive capital because lenders are able to assess the financial history and health of the portfolio. By purchasing a lendable business, you'll save yourself the stress and resources of starting a company from scratch.

In addition, this offers the chance to expand or change business offerings under an established brand name, potentially increasing profitability and market reach. Purchasing an existing small business also provides the opportunity to learn from the previous owner's successes and mistakes, highlighting what works and what doesn't. All these advantages make purchasing an existing small business an attractive proposition for those looking to start their own business and make money.

Related Reading: How to Buy a Small Business: Your Guide to Becoming a Business Owner

Types of Loans to Consider When Buying an Existing Small Business

Purchasing an established business can be a smart investment decision if you can secure the capital. If you don't have enough cash on hand, there are various loans available to help you buy the business.

Small Business Administration (SBA) Loans

SBA loans are government-backed loans that provide funds for small businesses. Contrary to what you might think, the SBA doesn’t actually foot any of the cash. Instead, it establishes the guidelines for loans and then guarantees a portion of those loans. Because lenders have much less risk in the case of a default, they’re more likely to provide funds to new entrepreneurs like you. While you can find an SBA loan option to cover just about every nook and cranny of your small business, some of the most common SBA loans include the 7(a), 504, and SBA Microloan.

• SBA 504 used for fixed assets such as land, a building, or machinery
• SBA 7(a) is used for working capital, debt refinancing, or purchasing business assets
• SBA Microloans used for working capital or to purchase inventory and equipment

SBA loans are one of the best options for those looking to buy an existing small business because of their favorable interest rates, longer-term lengths, and lower down payment requirements. Additionally, SBA loans may include working capital to help the business continue operating while under new ownership.

Fundid Recommendation: Fill out a simple, online SBA Loan application with Lendio! Lendio is the nation’s leading small business loan marketplace. With a single, free application, business owners can gain access to over 75 financial institutions that offer a number of different financial services. They have options from term loans and lines of credit to SBA loans and everything in between. See if you qualify without impacting your credit.

Business Acquisition Loans

A business acquisition loan is specifically designed to finance the purchase of an established business. These loans usually have fixed-rate terms. However, they tend to have higher interest rates and short repayment times, which may be an issue. Nevertheless, if you are looking for a loan that specializes in purchasing existing businesses, this is a great option.

Related Reading: What is a Business Acquisition Loan and Where to Get One

Seller Financing

Seller financing involves the seller of a business acting as the lender and providing financing for the buyer. Typically this is done by the seller financing a percentage of the overall purchase and the new buyer providing the remainder as a down payment. This usually comes with a higher interest rate than traditional loans, but because it is between the two parties, the interest rates on these loans may be negotiable between the buyer and seller.  When contractually agreed, owner financing may be a great way to purchase a small business if you find it difficult to secure traditional bank loans. 

What do Lenders Look for When Purchasing a Business

Purchasing an existing business can be an exciting opportunity to expand your reach and increase your profits. However, it's important to understand what lenders are looking for when considering your loan application.

Your personal credit score will be a big factor, as lenders want to ensure that you have a solid financial history. Since you are looking to buy an existing business, lenders may request to see up to 3-5 years of the company's financial documents to evaluate its performance and potential for growth. Additionally, they will want to review and evaluate any outstanding debt and the price the business is listed at. This will help the lender properly appraise the business to ensure that it is being sold at a fair price.

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Beyond these factors, the lender will want to understand the business's current reputation, business plan, and growth potential to assess better the risk factors that may be associated with backing the sale. With these elements in place, you can confidently approach lenders and secure the funding you need to acquire the existing business of your dreams.

Where to Get a Loan to Buy a Small Business

If you're looking for a loan to purchase a new business, there are several options available to you. However, choosing the right financing option for your purchase can feel overwhelming, so we've broken down your options for you!

It is becoming increasingly common for individuals to turn to alternative lenders when looking to secure financing. An alternative lender is a financial institution that provides loans outside of the traditional banking system. These lenders offer a variety of lending solutions, from short-term to long-term loans, and cater to a wide range of borrowers, including individuals with poor credit histories or businesses that do not meet the strict eligibility criteria of traditional lenders. Additionally, these lenders are often online, which saves you time and energy when applying for and managing your loan. Explore the best alternative lenders below!

Recommended Alternative Lenders

Lendio

Lendio is the nation’s leading small business loan marketplace. With a single, free application, business owners can gain access to over 75 financial institutions that offer a number of different financial services. 

• Basic Requirements for Lendio Loans:
  • 550+ personal credit score
  • $10,000+ in monthly revenue
  • 6+ months time in business

• Requirements for Lendio's SBA Loan:
  • 600+ personal credit score
  • $8,000+ in monthly revenue
  • 2+ years time in business

• Requirements for Lendio's Business Acquisition Loan:
  • 600+ personal credit score
  • $8,000+ in monthly revenue
  • 6+ months time in business

Apply today to see what loan you may qualify for! 

Traditional Banks

Many traditional banks offer business loans, but they often have strict criteria and lengthy approval processes. To qualify for a bank loan, it is recommended to have at least a 680+ credit score, although this will vary by lender. However, the main advantage of a bank loan is that you'll likely be working with an institution that has significant experience in lending and can offer you a range of options regarding term lengths, repayment schedules, and interest rates. Additionally, many banks have relationships with small business owners in your area, which can be a valuable resource as you look to navigate the challenges of owning and operating a business. 

Although this may feel like a lot to consider, you will be grateful to have completed your due diligence when you can feel confident with which lender you choose to partner with. Remember to focus on what is the best option for you, your business, and your financial future so you can enjoy launching your new business to greater heights.

Find Your Next Lender Through The Capital Marketplace

When embarking on this entrepreneurial journey, you will likely have a lot on your plate, so it's important to prepare all required documentation before contacting lenders to ensure the process is smooth and efficient. Once you feel confident you have all you need, check out our Capital Marketplace to find funding today!