Published By Faith Stewart at March 1st, 2021
Getting a loan to buy and existing business is a somewhat different animal than getting a regular business loan. There are plenty of options, but it can take some careful consideration and research to figure out which option will work best for you. What’s your best option for a business loan to buy a business?
It’s also important to know that, even if your credit isn’t the best, you can still get a business loan to buy a business. It may not be the traditional term loan you probably expect, but you can most likely still get the fund you need. Sometimes, it takes combining a couple of options to get the best funding for your specific needs.
Traditional loans are a decent first stop when you are trying to figure out how to get a loan to buy a business. If you have good personal credit, you’ll have no problem here. Furthermore, if your credit is good, you will get the best interest rates and loan terms from a traditional loan.
These are loans that are secured by some asset that you own. Rates are lower, and your personal credit doesn’t have as much of an impact. The bank is taking on less risk due to the fact they can take possession of the asset if you default. The business you are purchasing can be used as collateral for the loan. However, there are other, outside of the box options, that you can use if needed. We’ll talk about this more later.
Here’s another idea if you do not have or want to use assets as security for a loan, but your personal credit score isn’t quite up to par. Ask a friend or family member who has these kinds of assets or a good credit score. They may let you leverage their asset in exchange for a percent of your business. They usually want less of a percent of your company than a venture capitalist would.
If you are going to get help from friends and family to buy a business, asking them to sign on as a guarantor may be a better option than borrowing from them directly. That can cause a lot of drama.
Qualified borrowers may be eligible for SBA loans. These are loans guaranteed by the federal government. Yet, funds are distributed through banks. The application process is more involved. However, interest rates are often better. Typically, minimum credit score requirements are lower than what banks would offer without the government guarantee as well.
This program offers federally funded term loans up to $5 million. Banks, credit unions, and other specialized institutions, in partnership with the SBA, process these loans and disburse the funds.
The minimum credit score to qualify is 680. There is also a required down payment of at least 10% for the purchase of a business, commercial real estate, or equipment. The minimum time in business is 2 years. In the case of startups, business experience equivalent to two years will suffice.
These loans are also available up to $5 million. Terms range from 10 to 20 years. Funding can take from 30 to 90 days. They require a minimum credit score of 680. The asset you are financing is the collateral for the loan. In addition, there is a down payment requirement of 10%. This can increase to 15% for a new business.
There is also a 2 years in business requirement, or management must have equivalent experience if the business is a startup.
Alternative lenders are lenders that are not traditional banks or credit unions. These are typically private or peer-to-peer lenders that operate online, though not all operate online. They work better than banks for some because they will usually use other information besides credit score. As a result, they will often approve loans to borrowers with a lower minimum credit score if they meet other criteria.
These other criteria could include annual revenue, time in business, average balance in business bank account, and more.
One popular online lender that works well for funding to buy a business is Lending Club. You can get a quote in less than 5 minutes, and funds are available in as little as 48 hours if approved. There are no prepayment penalties. Loans go up to $300,000 and you need a minimum credit score of 620. Of course, details like this change frequently, so be sure to check with any lender directly for the most up-to-date information on rates and fees.
Lending Club is only one option. There are many out there, but you have to be careful. There are some great lenders, but there are also some predatory lenders in this industry. It can be hard to tell the difference. To ensure you are working with a reputable lender, consider working with a business credit expert. They can help you find the best lender with the best products for your needs. They can also help you figure out what you can improve to get the best rates and terms possible. This may include building business credit, or improving fundability some other way.
This is a form of collateralized business loan to buy a business that uses your existing 401(k) or IRA. This program uses IRS proven strategies. You will pay no tax penalties, and you still earn interest on your 401(k). Rates are low, and this option usually has a quick closing and funding process as well.
Credit Suite offers excellent options for this type of 401(k) financing. You can get up to 100% of current retirement
account value that’s “rollable” from a previous employer. Terms can be up to 5 years, and rates as low as 5.25% (Prime + 2) + $1995 rolled in lender fee.
There are no credit requirements. If bad credit is blocking you from getting the funding you need to buy a business, this is your chance.
For the retirement account to qualify, you must no longer be contributing, no longer be employed by the issuing company, and you must have a minimum of $35,000 in the account. Typically all that is required is a copy of the retirement account statement.
If you have trouble getting all the funding you need to purchase a business, you may be able to get help from the seller. Some sellers are willing to help buyers by bridging the gap with seller financing. Sometimes a seller will sell a business solely on seller financing.
Typically in these transactions, you pay at least one-third of the sale price up front. Then, the buyer makes payments for the rest directly to the seller, plus interest. Sometimes, a bank may be willing to lend this lesser amount, the amount of the down payment only, when they will not lend the entire selling price.
The reason for this is twofold. First, the lower amount means less risk for the bank. However, banks also see that if a seller is willing to finance, then they have faith that the business will continue to produce a profit into the future. This is seen as a positive.
That said, here is another option to get funding to buy a business. The Credit Line Hybrid offers no-doc, unsecured business financing. You can get up to $150,000. In some circumstances, interest rates can be as low 0% for a limited amount of time. This can be used as some or all of the down payment required for an SBA loan or seller financing. The interest rate could be substantially lower than using a bank loan. Furthermore, you can take on a credit partner. This is helpful if you do not meet the 680 minimum credit score or some of the other requirements. Even better, the Credit Line Hybrid reports to the business credit reporting agencies. That means you build business credit and fund your business purchase at the same time. A business credit expert can walk you through the process.
Borrowers who have a minimum credit score of at least 620 and at least 20% equity in their home can usually get a home equity loan (HEL) or home equity line of credit (HELOC). You can use funds from this type of loan to buy a business, but your house will be on the line. If you have the option of 401(k) financing or seller financing combined with the Credit Line Hybrid, that may be better.
If you have great credit you probably are not worried about how to get a business loan to buy a business. However, if your credit is less than desirable, you have probably been wondering how you could ever make it work. The fact is, there are options, and Credit Suite can help.
How to Improve Your Fundability™ and Get More Money for Your Business Faster