Finance To Buy An Existing Business ^NEW^
Conventional, SBA, and online lenders typically instruct small business owners to submit financial documents for the existing company, including cash flow, operating expenses, and physical assets. You should work with the current owner to get business valuation details and financial statements.
finance to buy an existing business
This head start comes at a cost, however. And if your personal savings don't cover the cost of your purchase, chances are you'll be looking to apply for a business loan. Depending on a range of factors, you may be able to get a loan to buy an existing business, but first you'll have to size up your needs and requirements, prepare the right information and documents, and shop for the right lender.
When you're buying an existing business, lenders want to know about both you and the business you want to buy. That's fair: Up to this point, you and your prospective business have had two entirely independent histories.
As they would with any loan, lenders want to know about your personal credit history. Do you have a history of successfully managing debt? Do you handle credit responsibly? They'll want information about your income, your current business (if you have one) and any relevant experience that makes you a good candidate for running this new business successfully. Here's a short list of items to prepare:
If you already own a business and are looking to acquire another to expand operations or change your business model, lenders will also want to know about the financial health of your existing company. Check with your lender for a full list of financial information they require, but be prepared to provide the following:
Further, they'll want to make sure your business strategy is sound and that your proposed business purchase has the income potential to allow you to repay your loan. Proving that could require showing:
Before you can apply for a loan, you need to assemble some basic information. Many of the answers you need will require input from the seller. Although this may seem cumbersome, it's also an opportunity to get some cold, hard facts about the business you're hoping to buy.
Business loans are available from a variety of sources. Your current bank or credit union (or the one your prospective business uses) is an obvious starting point, but you can also shop around for small business lenders. Online lending platforms like Fundera connect small business borrowers with multiple lending sources for a range of business loans including Small Business Administration (SBA) loans, business lines of credit and term loans. According to Fundera's website, borrowers with at least $150,000 in annual revenues, one or more years in business and credit scores of 600 and above have been successful in securing loans.
For many small business owners, SBA loans work where other lending options do not. The SBA doesn't make loans to small businesses; instead, it guarantees loans from lenders like banks and credit unions, which takes some of the risk out of lending. As a result, SBA loans typically have favorable interest rates, but also have specific criteria borrowers must meet to qualify. Look over the SBA's 7(a) Loan Application Checklist to learn more.
Some alternative lenders also offer small business financing and may offer business loans to entrepreneurs who have at least $50,000 in sales, have been in business for 12 months or more, have no bankruptcies or tax liens and own at least 20% of their business.Additional Ways to Finance Buying a BusinessGetting a loan to fund a business purchase isn't your only option. If you can't find a willing lender or your approved loan amount doesn't cover the cost of the business, consider these alternative funding ideas:
Use your personal funds. In addition to your regular savings, you can consider using investments and other sources of cash to help pay for your new business. Just be wary of tax consequences and the risk of depleting your emergency fund or nest egg: Even the best business opportunity represents some risk. You can also take your reserves of personal credit into account, although financing large sums of money at high credit card interest rates isn't an ideal way to fund your business as it can easily cause your credit utilization to shoot up, which could have big credit implications.
But some reasons for selling may be red flags, and it might take a little more work to uncover them. For example, if the business is losing business to a more popular competitor, or has a bad reputation, you could be facing an uphill battle from the moment you take over.
Some business valuation experts use a blend of two methods, such as the market approach and the income-based approach. In any case, the process of determining the value of a business is complicated, so you might want to consult a professional business broker or accountant who specializes in business valuations.
Better survival rate: Many new businesses fail in their first few years in business. According to a study published in Industrial and Corporate Change, business takeovers have a higher survival rate than new venture startups.
Existing cash flow: Because an existing business has all its operational processes and staffing already going, as well as an existing customer base, you can start generating cash flow on day one. In contrast, when you start a new business, it can take months or even years to turn a profit.
High upfront costs. Buying a successful business can be expensive. You may be able to buy a struggling business for less, but then you run the risk of acquiring a tainted brand, unhappy customer base or a dying product or service. Simply put, you get what you pay for.
Challenging to make it your business. When you buy an existing business, you also buy an existing company culture, mission, vision and values. It can take a lot of work to make changes that reflect your goals and turn a struggling company culture around.
But, buying a franchise business can be expensive. You typically need to pay an upfront franchising fee, in addition to the normal business startup costs, such as buying or leasing a location, purchasing inventory and equipment and hiring employees.
For example, according to LendingTree research, it can cost anywhere from $1.24 million to $3.53 million (not including land) to open a Sonic Drive-In, and $1.3 million to $2.3 million to open a McDonalds. And while you may be able to get financing to cover some of those costs, many companies require franchisees to have significant personal net worth and invest a large amount of their own money into the business.
Because your lender will need to get approval from the SBA to back your loan, the application process and paperwork for an SBA 7(a) loan can be lengthy. However, these loans typically boast better terms than traditional small business loans, and sometimes even come with counseling to ensure your business runs efficiently.
One distinction: if you are a sole proprietor, you will not need to provide a separate personal guarantee for your SBA loan because you execute the note yourself as a borrower (instead of as a business).
This website is owned by a private company that offers business advice, information and other services related to multifamily, commercial real estate, and business financing. We are a technology company that uses software and experience to bring lenders and borrowers together.
Online lenders offer a variety of loan products to small business owners, including term loans, which you can use to buy a business. They typically have less stringent qualification requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender if you have less-than-stellar credit.
The SBA 7(a) loan is the most common SBA loan and can help cover the costs that come with purchasing an existing business. It can also help you purchase real estate or land, finance equipment, refinance debt and meet working capital needs.
Jordan Tarver is the Deputy Editor for Loans at Forbes Advisor. Before joining Forbes Advisor, Jordan was an editor and writer for multiple finance sites, focusing on loans, credit cards and bank accounts. When he is not working on personal finance content, Jordan is a self-help author and recently released his book You Deserve This Sh!t
Because of this massive flood of businesses and the potential employment problem it could create, the Federal government has stimulated Main St. with funding through the SBA to encourage more transactions.
This low cost of capital has made the concept of buying a business make much more financial sense than starting one yourself, or becoming a franchisee. These people are known as Acquisition Entrepreneurs.
Whether you are a novice entrepreneur trying to finance your first purchase of a small business or an established entrepreneur looking to purchase a small business to expand your portfolio, you need money.
What options are available to obtain financing to fund this? A bank loan or your own savings? Asking a friend or applying for a line of credit? There are no rights and wrongs when it comes to getting the money to buy a small business.
The first and easiest source of financing for your next business purchase is using your own money. You might have enough funds in your bank to buy the business. Having stock investments can also be a potential source of funding.
Financing your purchase with cash is a rare practice and if you do this you will forgo the opportunity to further grow your investment through leveraging it. There is almost always a combination of equity financing and debt financing. You can fund the down payment from your personal funds and choose other ways to finance the remainder.
The Small Business Administration connects entrepreneurs with lenders and provides guarantees to the lenders instead of issuing the loan amount itself. This is without a doubt the most popular method of funding a small business acquisition and requires any Acquisition Entrepreneur to file an application for an SBA loan. 041b061a72