Financing A Business Purchase

Entrepreneurship is an exciting adventure. One of the most challenging aspects of purchasing your own company, though, is determining how to finance the purchase. Without adequate financing, you can’t reach your dream of business ownership. Fortunately, there are several avenues to finance a business purchase.

Buying an established business or a franchise is less risky than financing a new venture. This fact makes it more likely you’ll be able to find financing.

If you purchase:

• existing brick and mortar business, you inherit a customer base, company reputation, and employees. You also take over the company’s cash flow and profits. The fact that the business has already proved itself means that small-business loan lenders are more likely to give you a loan.
• SBA approved franchise, you inherit a proven business model, company reputation, and established products/services known in the market place. The fact that the franchise has already proven itself means that lenders are more likely to give you a loan.

Before making the business purchase, calculate how much money you’ll actually need for start-up costs, the purchase, and working capital. Most experts agree to pad your budget with an extra 20% to accomodate for extra expenses. 

To apply for a business purchase loan, you’ll need the following documents:

• Personal tax returns
• Personal bank statements
• Business bank statements provided to you by the business you’re acquiring
• Business tax statements provided by the business you’re acquiring
• Financial statements provided by the business you’re acquiring
• Business legal documents, including franchise agreement, articles of incorporation and commercial lease paperwork

Qualifying Factors 

Check out your credit score. The higher your credit score, the more options you’ll have for business loan funding. A credit score of at least 680 makes it more likely you’ll be able to get funding to purchase a business. If you have excelelnt credit, seller financing may be an option.  Meridian Business Advisors can discuss your options. There are also loan providers for individuals with scores as low as 600.  

Look at the length of business. The longer the business you’re buying has been in operation, the better.  For most online loans, the business needs to be operating for at least a year, and the requirements go up to two years for traditional bank loans.

Consider the type of business. Franchises have track records and can be attractive to lenders.   Several franchisors may have preferred lenders that will streamline the financing process.  The SBA will fund loans for SBA approved franchises and brick and mortar businesses.  

Analyze revenue. Lenders may require a minimum annual revenue and collateral. The lenders will also want to know if any assets or real property are included with the purchase.  

Examine cash flow. Directly related to revenue is the business’ cash flow, which will determine if you have enough money to keep the business operating while paying necessary bills, such as your loan payment. This takes doing a careful analysis of the financial records of the business you want to buy, as well as your finances.

Being Organized is Key

To apply for a business purchase loan, you’ll need the following documents:

• Personal tax returns and bank statements
• Business bank statements provided to you by the business you’re acquiring
• Business tax statements provided by the business you’re acquiring
• Financial statements provided by the business you’re acquiring
• Business legal documents, including franchise agreement, articles of incorporation and commercial lease paperwork
• Provide copies of your financial statements to your business broker at Meridian Business Advisors

 

---

Various financing options exist for funding the purchase of a business.

Traditional bank loans

Banks offer loans that allow you to purchase a business, including term loans, commercial mortgages, and lines of credit. They often offer competitive interest rates. Banks generally take 30-90 days to provide funding; time frame is dependent on the complexity of the business model and if real property is included. Most banks may also require you to submit a business plan to ensure your preparedness in running the business.  Considerations: Qualifying for a traditional bank loan:  business must show a high enough sales volume, have sufficient cash reserves and good/excellent credit score.

Small Business Association (SBA) loans

The Small Business Association (SBA) offers business loans through SBA approved banks. These loans are a good option if you have trouble qualifying for a traditional bank loan. The SBA’s 7(a) loan program offers up to $5 million.  If you’re in a hurry for funding, your purchase may qualify for the SBA Express, which gives up to $350,000. And if you’re a veteran, you can qualify for the SBA Veterans Advantage, which offers either $350,000, if processed under the SBA Express, or up to $5 million, if processed under the SBA 7(a) loan program.

Online lenders

A variety of online lenders offer the opportunity to quickly fund your business purchase. Such lenders provide loans up to an average of $500,000 and lines of credit that allow you to purchase a business. The APR on online lender loans varies widely, depending on the size of the loan, your credit rating, the repayment term and whether you’re providing collateral. APRs for online loans tend to range from 6% to 25%, or even higher.  Approval is more likely with online lenders, and you’ll often get funding very quickly. In some instances, you’ll have the money to buy your new business in as little as 24 hours.

Get Pre-Qualifed and Compare Your Options

Once you’ve chosen the type of loan you want, gather your necessary paperwork and fill out the required applications.  We work with many SBA approved lenders, banks and non-traditional lenders.   Some sellers will provide seller financing to buyers with excellent credit and if the terms are favorable.  

Our business partner, Guidant Financial, can streamline the pre-qualifying process. Your results will include your maximum funding amount and a list of your pre-approved funding options. However, there is no obligation to get pre-qualified through Guidant Financial. We provide it as a convenience for our clients.  They can provide 401(k) rollovers, SBA loans, lines of credit, commerical mortgages, small business loans, etc. Once you are pre-qualified, you should compare products and lenders to make the best decision for you.  

Click here to get started today.