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How to fund the purchase of a small business with a loan
Achieve your small business dreams by buying an established business.
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This article was reviewed by Doug Noll, a member of the Finder Editorial Review Board and award-winning lawyer, mediator and author with over 40 years of experience in the legal field.
Running your own small business is an appealing idea if you have the ingenuity and know-how, but it can take a lot of money to get it up and running. When financing, you have to convince a lender that you know how to manage a business and that you’ll be making a profit. There are different terms and conditions to be aware of — but also many options and tricks to help you get a better loan.
What’s in this guide?
What loans can I use to buy a new business?
When you’re ready to make an investment into your future and buy a new business, you can use one or more of these loans to finance your purchase.
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Business term loans |
$5,000 to $5 million |
Borrow a lump sum that you repay over a fixed period of time with interest and fees. |
Banks, credit unions, online lenders |
|
$5,000 to $5 million |
Similar to a term loan, but part of the loan is backed by the Small Business Administration, resulting in lower interest rates. |
Banks, credit unions, online lenders |
|
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Vendor financing |
Up to 100% of the business’s value |
Buy a business directly from the seller with a loan built into the terms of the sale. Repayments are often a percentage of the business’s future profits, though terms and conditions vary depending on what you negotiate with the seller. |
Small business sellers |
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Varies based on your retirement account |
If you have over $50,000 in a 401(k), IRA account or other retirement account, you can invest a portion of your funds into a new business without having to pay extra taxes or early withdrawal fees. |
Your retirement account |
|
|
$5,000 to $5 million |
Take out a term loan using assets of the business you’re going to buy — like equipment and real estate — as collateral. |
Banks, credit unions, online lenders |
|
|
Up to 80% of your home’s value |
Borrow against your home’s value to get financing for your new business. Home equity loans and lines of credit are usually tax-deductible and may have longer terms than your average personal or business loan. |
Banks, credit unions |
Compare loans you can use to purchase a business
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How to get a loan to buy a small business
Buying a small business is usually more cost-effective, but you may face the same problems that made the original owner sell, like poor location, outdated equipment or a lack of customers.
There are three main factors to consider before you even start to look for a lender:
- Determine how much money you’ll need.Borrowing too much means you’re paying more in interest than you need to. Borrowing too little means you won’t have enough and may need to attempt a second loan, likely at worse rates. Make sure your estimate is as accurate as possible.
- Have a solid business plan.Your plan should clearly show how the business will manage expenditures and income to remain profitable. It should also outline how long it will take to pay off the loan.
- Consider your repayment timeline.Determine how long it will take you to pay back the loan and how much you’ll be able to afford to repay per month. Will it be a consistent amount or can you pay back more as the business grows?
There are many different types of business loans. It’s important to know your options before starting an application or putting together a business plan.
What do lenders look for in an applicant?
Lenders are interested in four main aspects when considering you for a business loan.
- Your experience.People who already own businesses or those with experience managing companies have an edge on the competition. Your lender will want to see evidence that you know how to run a business. Otherwise, you may be too much of a risk. If you have limited experience, try partnering with someone with more — especially if they have experience in your industry.
- Your business plan.A business plan goes beyond laying out your goals for the future. When presented to a lender, it should highlight the costs and profits your business is predicted to have. Your projections should also include how your leadership as the owner will help make increased revenue a reality.
- Your assets.Whether you’re a new business owner or one with years of experience, a potential lender will want to see that you’re good for the loan should your business fail. Your creditworthiness, finances and the business you intend to buy will all play a role in your approval decision.
- Your industry.Beyond the business itself, a lender will be concerned with the industry you choose to sink money into. If it thinks the industry is too risky — no matter how well the business itself may be doing — you may not be able to secure a loan.
How can I get approved for a startup loan?
If the business you’re purchasing has been operating for less than a year, the lender will likely consider it a startup. The main obstacle between you and a loan is your ability to convince a lender that you can buy a small business and grow its revenue within a reasonable amount of time.
- Consider how profitable it will be in concrete dollar values and draw on as much evidence as possible. You must have financial projections to convince the lender that the business will be profitable.
- Having relevant small business management and financial experience may sway potential lenders. Don’t hesitate to mention that your own business history can help you succeed.
- Break down exactly how you plan on spending the money. If the money will go towards staff or refurbishment costs, a lender might expect a slower return on investment. Money pushed towards inventory and marketing might mean a quicker return.
Rather than applying for loans everywhere with a low success rate, your time is better spent honing in on a small number of good lenders whose eligibility criteria you meet. Before you can do this, you need tocompare startup business loansto rule out any you don’t qualify for.
6 more ways to finance business acquisition
Getting a loan can be challenging, but an applicant with motivation and a good business plan has no shortage of options. Here are six more ways to get money to buy a business.
1. Venture capitalists
These investors are groups or individuals that aggressively look for big returns on investment and have a particular interest in new startups. They typically offer money in exchange for equity or a share of the company ownership.
When the company grows and succeeds, this equity multiplies in value, making it a high-risk, high-return strategy for venture capitalists. To attract venture capitalists, you should have a plan for enormous, potentially global, business growth.
2. Angel investors
A more specific type of venture capitalist,angel investors are usually individuals rather than groups. They too want to acquire equity, but usually take a more active role in the success of the company and offer money as well as advice, experience, connections and other priceless intangible assets.
3. Government grants
The majority of small business assistance from the government comes in the form of free or inexpensive advisory and guidance services. There are alsosmall business grantsthat offer funds to businesses that meet certain requirements. See how business grants compare to business loans and which might be better for you.
4. Crowdfunding
Crowdfunding involves setting up an online campaignto raise small amounts of money from the public. This can be a good litmus test of whether or not the general public is ready to believe in your business.
Your success here is largely down to luck and the size of your social network, but your odds improve by being skilled in marketing. Being able to offer your supporters gifts, freebies and having a promising, well thought-out business plan also help.
5. Family and friends
The terms, conditions and benefits you get from these loans depend on how much money your friends and family have and how much they are willing to invest in you. Many successful enterprises got their start with loans from family and friends, so this option shouldn’t be disregarded. Keep everything official and professional by maintaining a written record of any deals made.
6. Your own savings
If you believe in your business plan, then this is a good place to start. Keep loans down by using as much of your own personal savings as you feel comfortable with. Some lenders, particularly angel investors and venture capitalists, will regard this highly and be more likely to invest in your business if you have this kind of personal stake in its success.
Bottom line
Buying a business can be a stressful time, especially when you’re searching for ways to make it affordable. By seeking out the right loans and investors, you can make your dreams a reality. Just be sure tocompare terms and have a strong business planbefore signing on the dotted line. Otherwise, it’s your savings and credit on the line.
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Ask an Expert
Right now I have assets and I want to grow my business so I am kindly asking you if you can offer me a loan.
Hi Felix,
Thanks for getting in touch!
It’s good to know that you have assets and you’re wanting to grow your business! To know if you can be approved a loan. review the eligibility criteria of the loan before applying to increase your chances of approval. Read up on the terms and conditions and product disclosure statement and contact the bank should you need any clarifications about the policy.
Hope this was helpful. Don’t hesitate to message us back if you have more questions.
Best,
Nikki