Loans to Purchase an Existing Business: Financing Options

Entrepreneurs will often choose to buy an existing business instead of starting one from scratch. There are many benefits to doing this. For starters, you will automatically gain an established customer base. The benefits of this cannot be overstated. For many business owners, earning customers proves to be the hardest part of running a company.

Not having to spend money on marketing and research right away is a huge money-saving benefit from the start. Buying an established business also usually comes with knowledgeable employees. This again is a huge plus that saves the new owner time, energy, and resources.

There isn’t a pressing urgency to seek out help since you already have fully-trained staff. What’s more, you don’t have to spend money on training programs or devote a large portion of your time to making sure your employees understand the company’s rules and regulations.

And then there’s the possibility of buying an existing company that is already doing steady business. Most entrepreneurs aren’t going to sink their money and assets into a business that’s dying, so it’s safe to assume that there will be an inheritance of reliable cash flow, as well.

All of these factors aren’t just benefits for the new owner. They can also play a huge role in securing the loan needed to buy the existing business. With that said, it’s not going to be easy. So before you start off trying to get a loan, you should first do plenty of research to improve your chances of getting the financing you need.

How to Finance Your Purchase

Financing the purchase of a business already in place is a lot different from financing a new startup business. Existing businesses already have a track record and can show how they’ve been successful. As such, it is typically much easier to secure funding for this kind of investment compared to seeking financing for a brand new business.

Financing Options

You have quite a few financing options to choose from. This fortunate, as you can use more than one option in conjunction with another for maximum results. Let’s explore your funding options to help you better determine which ones are right for you.

Personal Funds

If you already have a considerable amount of money saved up, you might want to turn to your savings to fund your new investment. Before you do, though, you’ll want to make sure that you don’t have other financial obligations that your investment could take away from.

If you are all caught up on your commitments, you then need to consider unexpected expenses. If you don’t have enough set aside for an emergency fund, for example, you could be putting yourself at risk by pouring all of your savings into the existing business.

If necessary, consider using some of your savings in conjunction with an SBA loan (more on that in a moment).  This could give you the support you need to meet your outside financial obligations without shooting yourself in the foot.

Bank Loan

It’s no secret that traditional bank loans aren’t the easiest to obtain. This is especially true when it’s for a business acquisition. However, you can significantly increase your chances of getting a bank loan if you have great credit. Also helpful to your cause is if the existing business you want to buy has substantial assets. 

If you don’t meet these strict qualifications, you might be out of luck getting a bank loan. Fortunately, you aren’t out of options for getting the funding you need for your purchase. Read on to find out what else you take advantage of.

Seller Financing

In some instances, the seller of the existing business will loan you the money and let you pay it back to them over time. If this is a viable option, the seller will usually let you pay with profits from the business. This is an excellent option that can make things a lot easier on your bank account.

SBA Loan

In the context of buying an existing business, an SBA loan is likely to be your best option for securing a bank loan. Specifically, an SBA 7(a) loan is ideal for business acquisitions in that they are much easier to secure. This is because an SBA 7(a) loan is backed by the government, which is far more appealing to potential lenders.

The SBA (Small Business Administration) guarantees the lender that they will pay a certain percentage of the loan in the event that you default on it. As such, lenders are far more likely to approve these types of loans.

What’s more, the SBA will sometimes agree to pay back as much as 85% of the loan total, significantly improving your chances of getting approved. It’s worth noting that the SBA isn’t the one who provides the loan. Instead, they work with a network of lenders and work to get you the best rates and terms possible.

Assumption of Debt

With an Assumption of Debt, you agree to buy the existing business’s assets and liabilities. As its name suggests, you agree to take on any of the business’s outstanding debt. For this option to work, however, you will need to first get the approval of the business’s debtors.

Leveraged Buyout

This option typically works in conjunction with other financing options. In a leveraged buyout, the existing business’s assets are used as leverage to assist in funding your acquisition. Because assets may not cover all expenses, you will need to secure an additional loan.

Which Option Is Right for you?

To determine which option is the best fit for your needs, you’re going first to need to figure out how much money you are willing to invest in the existing business. Furthermore, you’ll also need to determine how much money you are willing to risk.

When you have come up with both figures, you can then start weighing the pros and cons of the above financing options. Used together, you should have a pretty good idea of what makes the most financial sense for you and the existing business.

If your credit score is spotless and you the business you’re planning on buying has considerable assets, an SBA loan will likely be your most favored option. 

But if you and the existing business are lacking in these areas, you should seriously consider seller financing if the option is on the table. The good news is that even if your first choice doesn’t pan out, you can always fall back on another.

Aside from financing options, one of the best things you can do for yourself and your new business is to plan accordingly. This means setting aside funding to cover additional expenses. These include closing costs, operational costs, marketing (if needed), maintenance, etc.

Walking into your new business unprepared is likely to result in you becoming overwhelmed with expenses and obligations. As such, you should take the time to construct an action plan well ahead of time. 

This will make it easier for you to eliminate pressing issues that need your immediate attention. Putting them off until later in the game will only serve to complicate matters. 

Preparing for Lenders

If you ultimately opt to use a lender to fund your purchase, you can get a head-start on the loan process by compiling pertinent information and documents. Not only will you need personal information about yourself, but also data about the existing business. 

As such, you can do yourself and your lender a big favor by getting your credit score ahead of time. If you already own a business, be sure to get your business credit score, as well. Along with this information, get your tax returns ready to present, as well as your cash flow statement and any outstanding debts.

Information for the existing business includes its balance sheet, profit margin, and business tax returns. Having this documentation ready in advance will ensure that the loan process goes smoothly and efficiently. 

Summary

Here at Seek Capital, we specialize in helping small business owners realize their dreams. To date, we have successfully secured over $400 million in financing. If you require assistance with your business ventures, we encourage you to contact us. 

Our business loan experts will be happy to assist you in your journey. In the meantime, don’t forget to check out our extensive blogs section. We have compiled a wealth of articles that are sure to benefit you. From starting your own business to improving customer relations and much more, you have a free resource to use as you please.

If there is anything else that we can help you with, please feel free to contact us at any time. We look forward to assisting you and hope to hear from you soon.

 

Sources

https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans

https://www.sba.gov/

https://stats.oecd.org/glossary/detail.asp?ID=550

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