Financing the Purchase of a Business
Financing a business acquisition requires careful planning and analysis of all your options. I recommend that you begin your search for financing with a bank or SBA loan because these are generally the least expensive sources of capital
It’s typically easier to get bank or SBA financing to buy an existing business than to start a new one because the business already has a track record that the lender can evaluate.
Most lenders will first consider you for an SBA loan because these loans are partially guaranteed by the U.S. Small Business Administration. SBA loans have the most competitive interest rates and longest repayment terms.
The downside of working with a bank or SBA lender is that it can take a long time to get financing and can be difficult to qualify for a loan. In the next section, we explain what you need to qualify for a bank or SBA loan.
What Do You Need to Qualify for a Bank or SBA Loan?
Your ability to get a bank or SBA loan for a business acquisition typically depends on four main factors:
* Your personal credit score (should ideally be over 650).
* Business management or industry experience (3-5 years of experience)
* Down payment (need 10-30 %)
* Collateral (can be business and/or personal assets).
Loan Application and Documents
When buying a business, many documents exchange hands between the seller and the buyer. When applying for a loan, you will be asked to submit financial and other documents for the business.
The purchase agreement states the final purchase price of the business, what is being bought, what actions are required by the seller and buyer at closing, and the effective date that ownership of the business is transferred to the buyer.
Financial Documents for the Business
There are a variety of financial documents for the business that the lender will need to evaluate its financial condition:
* Last 3 years business tax returns
* Current year income statements, balance sheets, and cash flow statements
* Information on outstanding business debts
* Business lease
* Organizational documents for the business (e.g. incorporation docs and business licenses)
Include a resume for yourself and any business partners. The resume should highlight related industry experience and general experience in running a business.
It’s vital to include a comprehensive business plan so the lender can evaluate the business’ future potential.
You should outline the business’ past history, its current condition, and your strategy for increasing profits, describing how the loan proceeds will help you accomplish your goals.
Include 3-year financial projections for the business. At least the first 12 months should be broken down monthly.
What If I Want to Buy the Business Real Estate?
Most people who buy a business purchase the assets and revenue stream of the business and pay rent to occupy the building from which the business is run. Sometimes there is an opportunity to also buy the business building or office.
If your acquisition includes the purchase of real estate, then you can get an SBA 504/CDC loan for that portion of the purchase. 504 loans are typically the cheapest option to finance real estate purchases. They require a 10 % down payment and have 10-20 year terms. However, 504 loans can only be used to purchase real estate and equipment, so another loan (e.g. an SBA 7(a) loan) would need to be used for the remainder of the acquisition.