How to Finance a Business Purchase
Investigate SBA loans., Meet with financial institutions., Assess the collateral you can provide., Get pre-qualified for several loans., Consider alternative loan options.
Step-by-Step Guide
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Step 1: Investigate SBA loans.
The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations.
To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans.
The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments.
Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses.To qualify for this type of loan, you must:
Own or seek to own a small business as defined by the SBA.
This information can be found on their website.
Plan to operate for profit.
Plan to operate within the United States or its possessions.
Have your own assets invested in the business.
Show a need for the loan.
Not owe the US government any money. -
Step 2: Meet with financial institutions.
Financing is also available through local lending institutions, like banks and credit unions.
However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral.
To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score.
It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.
If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for., Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan.
For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value.
When providing collateral for the banks to use, you can include any of the following:
Equity in your own home.
Assets owned by the business, like accounts receivable and inventory.
A personal guarantee.
This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged.
This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale. , Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans.
This means going through the loan process with each lender and getting the go-ahead from them to purchase the business.
You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.
Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.
You will need to be pre-qualified for more than the purchase price of the business.
You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money).
You can work with the current owner to assess how much is needed., There are many other sources of loans available to finance the initial purchase of a business.
For some people, there may be an opportunity to borrow money from friends or family.
However, bear in mind that this may damage your relationship with that person if things go south.
Some other options you can consider include:
Peer-to-peer (P2P) financing.
Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people.
However, rates on these sites are typically higher than what a bank or the SBA could offer you.
Microloans.
Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years).
Check with the SBA or a microlending specialist to investigate your options. -
Step 3: Assess the collateral you can provide.
-
Step 4: Get pre-qualified for several loans.
-
Step 5: Consider alternative loan options.
Detailed Guide
The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations.
To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans.
The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments.
Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses.To qualify for this type of loan, you must:
Own or seek to own a small business as defined by the SBA.
This information can be found on their website.
Plan to operate for profit.
Plan to operate within the United States or its possessions.
Have your own assets invested in the business.
Show a need for the loan.
Not owe the US government any money.
Financing is also available through local lending institutions, like banks and credit unions.
However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral.
To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score.
It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.
If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for., Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan.
For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value.
When providing collateral for the banks to use, you can include any of the following:
Equity in your own home.
Assets owned by the business, like accounts receivable and inventory.
A personal guarantee.
This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged.
This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale. , Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans.
This means going through the loan process with each lender and getting the go-ahead from them to purchase the business.
You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.
Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.
You will need to be pre-qualified for more than the purchase price of the business.
You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money).
You can work with the current owner to assess how much is needed., There are many other sources of loans available to finance the initial purchase of a business.
For some people, there may be an opportunity to borrow money from friends or family.
However, bear in mind that this may damage your relationship with that person if things go south.
Some other options you can consider include:
Peer-to-peer (P2P) financing.
Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people.
However, rates on these sites are typically higher than what a bank or the SBA could offer you.
Microloans.
Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years).
Check with the SBA or a microlending specialist to investigate your options.
About the Author
Richard Cooper
A passionate writer with expertise in practical skills topics. Loves sharing practical knowledge.
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