Different options for financing the purchase of an existing business
July 21, 2023 ⋅ 8 min read
Acquiring an existing business requires a significant investment. One of the biggest challenges is not just finding the right business, but figuring out a way to pay for it.
Whether it’s through seller financing, SBA loans, or alternative financing options like crowdfunding, there are various financing options available for prospective business buyers.
Understanding the different financing options available to prospective buyers can help you make a decision that best fits your needs and goals.
What is the process of buying an existing business?
So, you've decided to buy an existing business. Congratulations! It's an exciting step towards becoming a business owner. However, before you start browsing through business listings, there are a few things you need to consider.
First things first: You need to have a solid understanding of your finances. How much of a down payment can you put towards the purchase of a newly acquired business? Small business owners often rely on financing options, such as loans or seller financing, to make up the remainder of the purchase price.
Think carefully about the type of business you want to purchase. Are you looking for a turnkey operation that's already established and profitable, or are you more interested in a fixer-upper that you can improve and grow over time? This decision will help you narrow your search and save time throughout the buying process.
Once you've identified a business you're interested in, it's time to start due diligence. This involves a thorough examination of the company's operations, financials, and legal history. Due diligence is a critical step in the buying process, as it helps to identify any red flags or potential deal breakers.
Assuming due diligence checks out, it's time to negotiate the terms of the purchase and draft a sales agreement. This document will outline the terms of the sale, including price, financing terms, and contingencies. Finally, it's time to close the deal and take control of your new business.
How to buy an existing business with no money
So, you've found the perfect business to buy, but you’re a little short on personal funds to finance the purchase.
The good news is, there are financing options available that can help you make your business ownership dreams a reality. Here are some ways you can buy an existing business with no money.
Can I finance the purchase of a business?
Yes, you can. Even if you don't have personal funds, there are other ways to finance your purchase. The most important thing is to have a solid business plan and show the potential lender how you will generate enough revenue to repay the investment.
A leveraged buyout involves borrowing money to buy the business, typically using the assets of the business itself as collateral. This means you can purchase the business without having to use your own money upfront. The downside of a leveraged buyout is that the assets of the business will be at risk if you cannot repay the loan.
Seller financing is a common option when buying a business. In this situation, the seller of the business finances some or all of the purchase price. The seller may require a down payment or agree to finance the whole amount. This type of financing is attractive to buyers because it does not require a traditional bank loan and may offer better terms.
Assumption of debt
Another option is to assume the seller's debt. If the business has outstanding debt, you can negotiate with the seller to assume the debt in your purchase price. This can be a good option if the debt is manageable and you have a plan to pay it off.
If you don't qualify for seller financing or assumption of debt, then bank loans are the next best option for financing your purchase. The Small Business Administration (SBA) is a government agency that provides loans to small businesses. SBA loans have lower interest rates than traditional bank loans and may be easier to qualify for.
There are additional small business financing options, such as grants and crowdfunding. Grants are usually given to businesses that are engaged in research or developing new ideas. Crowdfunding allows you to get funding from a large group of people who are interested in your business idea.
How hard is it to get a business loan to buy an existing business?
Getting a business loan to buy an existing business isn’t always easy.
Banks are often hesitant to lend money to buy an existing business, due to the high risk involved.
Financial institutions have to evaluate the existing business's financial statements and performance history to determine its profitability and viability. They also have to consider the potential purchaser's credit history, qualifications, and financial stability.
Each type of financing can have its pros and cons - here's what you need to know about the available options.
Securing a Small Business Administration (SBA) loan can be a challenge, but is often an attractive option when acquiring a business with a solid financial track record. It’s important to be aware that the qualification requirements for these loans tend to be stringent, and the application process can be quite lengthy.
Even after meeting all requirements, businesses will still have to offer a personal guarantee and collateral, making an SBA loan a more high-risk option for business owners. The SBA loan process favors the most established businesses with a sizable financial track record.
Traditional term loans
Similar to an SBA loan, traditional bank loans generally require extensive documentation and a solid credit score. Banks typically prefer to lend to established businesses with a solid track record, making it difficult for first-time buyers to secure funding.
Even if you have all the necessary documents, banks may still deny your loan application due to concerns about the business's stability or market conditions.
This type of funding is specifically tailored to buying new equipment or machinery to support the existing business you seek to buy. Consider this type of financing if the business only requires funding to support new equipment or machinery, as it will not provide the necessary funds to acquire the business.
Online term loans
With the rise of alternative lenders and online financing options, applying for a loan to finance buying an existing business has become slightly easier. However, the circumstances and requirements of these lenders vary widely. For example, online lenders generally operate with faster application processing timeframes than traditional banks, but there may be less flexibility with regard to interest rates.
Credit unions are another potential source of financing for small businesses. Typically, credit unions offer lower interest rates than traditional banks, but their loan amounts may be smaller and harder to qualify for.
Things to do before applying for a business loan
Before jumping into the loan application process, there are several things you need to consider to ensure you meet the lender's requirements.
First, review your financial statements, including your balance sheet and income statement. This will enable you to have a clear understanding of your current financial standing and how much money you can afford to borrow. It will also give the lender an idea of your ability to repay the loan.
Lenders will also want to see that you have enough money in your bank account to cover the loan payments. If you have a history of overdrafts or bounced checks, this could negatively impact your chances of getting the loan.
Make sure you also have a solid business plan. This will demonstrate to the lender that you clearly understand your business and how the loan will help you achieve your goals. Your business plan should include information about your fixed assets, accounts receivable, and any other sources of collateral that you can offer. If the business you're acquiring has cash on hand, you'll want to align with the seller ahead of time on how to handle cash assets.
What do lenders consider when applying for a business loan?
Here are some key factors that lenders commonly weigh when evaluating a business loan application:
Your cash flow
Lenders want to know that you have enough monthly cash flow to cover the loan payments. They may ask for your financial statements, including income statements and cash flow statements, to evaluate your business's revenue and expenses.
One of the most important factors that lenders consider is your credit score, which indicates your creditworthiness and ability to repay the loan based on your track record of managing credit in the past.
Lenders want to make sure that the money they're lending you is being used for a worthwhile investment. If the purchase price of the loan is too high, lenders may turn down your application.
Lenders want to see a well-thought-out business plan that outlines your goals, market analysis, financial projections, and how you plan to use the loan funds.
Lenders often require some form of collateral to secure the loan. This can include substantial assets such as real estate, inventory, or equipment that they can sell to recoup their losses if the loan is not repaid.
Legal and regulatory compliance
Lenders may also check if your business is in compliance with all relevant laws and regulations. This includes things like business licensing and tax filings.
There are several financing options available to those who are interested in purchasing an existing business, and each option comes with its own set of advantages and disadvantages.
Whether you choose to take out a small business loan, crowdfund, or use your own personal savings, it's crucial to have a solid plan in place before making any moves. Baton can help you determine the right buying plan for you and connect you with a professional in our vetted network.