How To Get A Loan To Buy A Business

Buying a business is a big step in your career, even if you’ve already done it before. While there are many factors to consider along the way, getting a loan to buy a business is one of the biggest. For starters, you’ll need to meet a long list of requirements with high standards before a bank will loan money to you. The type of loan you acquire matters. One of the best ways to obtain business loan financing is to go with a Rollover for Business Startup or ROBS, which allows you to use the funds from your retirement savings penalty free. Then, use the cash to cover 100 percent of your purchase or as a down payment on an SBA loan. This article includes how to get a loan to purchase a business.

How To Buy A Business

The first step to buying a business is to obtain the right loan, but buying a business loan can be tricky. Luckily, you have a few different options. The best loan to buy a business is the one that gives you the best possible outcome under the circumstances you have to work with. Here are the top five most common.

SBA Loans

SBA loans are partially guaranteed by the United States Small Business Administration (SBA). They are a good option for small business owners because they tend to be a safer option for lenders, which means you’ll be more likely to be approved. They are also a good option if you don’t have enough collateral to get a traditional loan from a bank because chances are you will still get approved. Out of all the different types of business acquisition financing, SBA loans have the most extended repayment options and most competitive interest rates. But in some cases, they can be difficult to qualify for. Furthermore, once you’re approved, you may have to wait up to 120 days or longer before you can get your money.

Most of the time, it’s easier to get approved for an SBA loan when you want to buy an existing business rather than a startup. The terms of the loans look similar to a traditional bank loan, and you may have to use some collateral. Typically, you can borrow up to five million dollars with an SBA 7a loan, but keep in mind that the lender won’t cover the entire amount of the purchase price. Because of this, you’ll need a down payment of around 10 to 20 percent. Interest rates are based on the current prime rate, which is typically around 6 to 9 percent. You can expect SBA loans to have a fee of at least 3 percent of the entire loan amount for loans that are priced over $150,000. You may also have applications fees, prepayment fees or third-party closing fees to consider. Repayment terms go up to 25 years for real estate and ten years for working capital. To get approved, you’ll need a credit score of at least 680 and at least three to five years of experience in a managerial level or higher.

Pros

  • Long repayment plans
  • Low interest rates
  • Down payments as low as 10 percent

Cons

  • Slow application process
  • Lots of paperwork
  • Harder to quality for than other loans

Rollover for Business Startups (ROBS)

A rollover for business startup or ROBS allows you to access funds from your retirement savings to acquire a business without fees. In other words, you won’t be charged taxes or early withdrawal fees when you use your retirement money. The funds are also available rather quickly, within two to three weeks, which is four times as fast as a traditional bank loan. A ROBS is not considered a loan since you’ll be tapping into your own money source, so you won’t have anything to pay back, and you won’t have to make future payments to a lender. This means you’ll never be in debt, but you will be reducing the amount of money you have access to later in life.

A ROBS can be a good option if you need to buy a business quickly. In most cases, business acquisitions are time sensitive, which means that you’ll need the funds as soon as possible. If not, the seller may decide to go with someone else who can offer the money right away such as a bank, and you’ll lose the opportunity to close the deal. For this reason, many people choose to go with a ROBS. To qualify, you’ll need to have at least $50,000 in your IRA, 403(b), 401(k) or another retirement account. There are some requirements you need to be aware of before using a ROBS, so you may want to protect your business by consulting a ROBS professional. Consultations are usually free. Fees associated with acquiring a ROBS are around $5,000. You’ll also need to pay $140 a month to manage the account.

Pros

  • No interest or debt as the money is already yours
  • No early withdrawal fees or taxes
  • Obtain money within two to three weeks
  • Use it as a down payment or combined with other financing options

Cons

  • Risk of deleting your retirement account
  • Ongoing monthly charges
  • Hefty setup fee

Seller Financing

Seller financing occurs when the existing owner of the business you’re trying to buy agrees to finance all or some of the price of the company. This allows you to borrow less money or get approved for a smaller loan that you wouldn’t otherwise be able to qualify for. It’s also a good sign that the current owner is willing to help you out so that you succeed in the future with your new business. Sellers usually offer to finance around 15 to 60 percent of the purchase price. Rates are amortized and similar to the ones on the market with an APR of approximately 6 to 10 percent. But keep in mind that these terms vary from seller to seller. A seller may even offer to cover all of the purchase price. If he or she only offers to cover a portion of the cost, then the buyer will need to make up the difference with an SBA loan, cash, or 401k business funding. Most sellers will want to check your credit before the offer up financing. Your credit doesn’t have to be perfect, but a seller will usually want to see a credit score of at least 600.

Pros

  • Low interest rates
  • Seller helps you with the price and is interested in the continued success of the business
  • Terms are negotiable with the seller

Cons

  • Sellers usually only cover a portion of the cost, so you must come up with the rest
  • Not available in all purchases
  • May require other financing

Home Equity Credit Lines (HEL or HELCO)

A home equity loan (HEL) or a home equity line of credit (HELOC) is a good option if you don’t mind putting your personal home up as collateral. Keep in mind that this puts your house at risk if the business falls through or you can’t make your loan payments. One study found that about 25 percent of small business owners have used this method to qualify for at least part of the funds they acquired to buy a business. HEL and HELOCs are similar because they both use the equity you have in your home for financing, but they differ regarding how much money you’ll get out of it.

A HEL offers a one-time loan where you get all the funds at once. You’re expected to pay interest on all of the money through amortized monthly payments. On the other hand, a HELOC offers a credit line just like a credit card. You can make withdrawals until you reach your limit and you only pay interest on the amount you borrow. To use either, you need to have at least 20 to 30 percent equity in your home and a credit score of 620. The upside is that these loans can be less expensive than SBA loans or traditional loans from a bank. The only collateral you use is the home you live in. It’s also a very flexible way to borrow money for just about anything you need, such as purchasing a business.

Pros

  • Lower than average interest rates
  • Flexible fund terms

Cons

  • Uses your home as collateral
  • Risk losing your home
  • Reduces equity in your home

Borrow Money From Friends and Family

It might come as a surprise, but lots of new business owners borrow money from their friends and family. According to the National Venture Capital Association, approximately 24 percent of startup business owners obtain a private loan from someone they know, such as a friend or family member. When asking for money, keep in mind that businesses that are currently in operation are usually more expensive than what you can raise from friends and family alone. But you could use this method to help you with a down payment or pay for at least a portion of the price. Borrowing from friends and family can be tricky. It’s a good idea to make it an official business transaction by putting the loan in writing. Treat your repayment plan like you would any traditional bank loan by making monthly payments. As a general rule of thumb, never mix personal and business loans as this can get messy when it comes to repayments.

Pros

  • Convenience
  • Fast
  • Terms are negotiable
  • No interest rates

Cons

  • Risky if the business fails
  • Only an option if you have friends and family with money
  • Most businesses cost more than what can be borrowed, so additional financing may still be needed

Business Financing Acquisition Timeline

Acquiring your business can take longer than expected. It’s important to know exactly what to expect during this time. This will vary depending on the type of loan you choose. You’ll want to make sure your loan coincides with the length of time it takes to close on your business. Use this timeline breakdown to determine what documents you’ll need and whether you have enough time to seal the deal before the seller considers someone else.

  1. Weeks one, two and three

During the initial inquiry week, you’ll need to sign an NDA to get some basic information about acquiring a loan. Once you get this information, a lender will like to know that you’re interested in moving forward within one week of receiving it. It could take up to two to three weeks to get this information, so if you’re serious about moving forward, then you’ll want to gather other paperwork to save on time later. You may also want to reach out to other lenders to weigh your options.

  1. Weeks three and four

After you’ve received your loan information and made the decision to move forward, you’ll need to submit a letter of intent with your expected offer to the seller (the amount of money you require for the price of the business). If you’re accepted, the seller will want to know how you plan on paying. It helps to get a pre-approval letter to show that you plan on financing the company from here on out.

  1. Weeks five through eight

Once your letter of intent has been accepted, you’ll want to review all of the company’s information to make sure you want to move forward. It also helps to set up your financing during this time. Work with your lender and be sure to submit all the documentation needed to secure your loan.

  1. Two months or more after initial interest

Your purchase and closing agreements will be the last step in acquiring your business. This could take a few days or a few weeks. During this time, you’ll negotiate the purchase agreement with the seller, sign it and close on it. Your financing should be available at this point so that you can make a down payment or present the seller with the entire cost of the business to ensure that you don’t lose it to someone else.

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