A Guide To Getting a Loan To Buy a Business

How To Finance a Business Purchase

You can use one of these financing options or combine several to help you buy a business.

SBA 7(a) Loans

The U.S. Small Business Administration (SBA) guarantees part of the loan, which lowers the lender's risk. This lets lenders offer longer terms. Expect to make a down payment of at least 10% on SBA loans.

SBA 7(a) loans allow you to borrow up to $5 million, with terms up to 10 years. That term length extends to 25 years when real estate is part of the deal. SBA loans take longer to approve, typically 30 to 90 days, so they aren't great options if you need money quickly.

SBA 504 Loans

The 504 program is used for commercial real estate and heavy equipment. Here's how it works: a bank lends up to half the cost of the project, and a certified development company lends up to 40%. You're responsible for at least 10%.

Conventional Bank Loans

This is a commercial term loan. Banks can offer low rates, but they look for borrowers with strong credit, assets, and industry experience. Expect to provide financial statements and put down at least 20%.

Seller Financing

The seller covers part of the cost at closing. They take a promissory note, and you pay them back. Terms are negotiated with the seller ahead of closing.

Business Lines of Credit

This isn't to buy the business. Think of a business line of credit as a way to cover the day-to-day. Use it to cover payroll, inventory, and during a slow month.

Secured Loans

Secured loans are backed by something you own, like real estate, inventory, or equipment. The asset acts as collateral, which helps to lower the rate.

Home Equity Line of Credit (HELOC)

If you own a home, you can use a home equity line of credit (HELOC) to help pay for costs associated with buying a business. You get a revolving limit, pay interest on what you draw, and the limit refills as you repay.

It works similarly to a business line of credit. You can use it to pay for day-to-day expenses. The difference is your house is collateral, so it's at risk if you can't repay.

Minimum Qualifications

$10,000 in monthly revenue

Your business must earn at least $10K per month in a business bank account.

500+ credit score

You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.

Minimum six months in business

Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.

Have a business bank account

Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.

Start Application

How To Get a Loan To Buy a Business

Getting a loan to buy a business follows four clear steps. Here's what you need to know.

Step 1: Pick a lender that does acquisition loans

Look for SBA Preferred Lender status. You can also check a lender's track record on deals of a similar size.

Step 2: Sign a letter of intent (LOI) and get a valuation

The LOI is a preliminary document that outlines the terms of the deal. A valuation lets you know how much the target is worth.

Step 3: Gather your documents

Organize tax returns (yours and the target's), your personal financial information, and proof of your down payment.

Step 4: Apply and start due diligence

The lender reviews your application while you do your due diligence on the business.

What Lenders Consider

Lender requirements vary, but they generally weigh the following things. "Target" here means the business you want to buy:

The Costs Involved in Buying a Business

The total cost of buying a business includes a few additional costs. Start with your down payment, which is typically 10% of the total project cost on an SBA change of ownership. You'll also need to pay the SBA guaranty fee, which generally runs about 0.25% to 3.75% of the guaranteed portion of the loan.

Expect to pay for a business valuation, which typically runs a few thousand dollars for a small business purchase. Other costs include attorney and accounting fees, leases, and liens. Interest is another high cost you can expect to pay over time.

A Due Diligence Checklist for Buying a Business

Due diligence is the 30- to 60-day window after the LOI. You verify everything the seller told you during this time.

Here's a checklist you can use for the process.

Financial Checklist

• Three years of business tax returns, matched against seller-provided financials

• Three years of profit and loss statements and balance sheets

• Trailing 12-month profit and loss, broken out by month

• Aging reports on accounts receivable and accounts payable

• 12 months of bank statements

• The revenue share of the target's top five customers

Legal Checklist

• Articles of incorporation, operating agreements, and bylaws

• Real estate and equipment leases

• Intellectual property registrations and assignments

• Pending or threatened lawsuits, audits, or regulatory issues

• Outstanding liens

Operational Checklist

• Org chart with employee tenure, role, and pay

• Key-person risk, or which employees might leave once the business sells

• Vendor and supplier contracts

• Software contracts and renewal dates

• Insurance policies and recent claims history

Market Checklist

• Industry trends affecting customers

• Top three to five competitors

• Pricing power, or when the target last raised prices

• Regulatory or technology risks

Finance Your Purchase With Clarify Capital

Selecting the right financing comes down to the type of business you're buying and your personal financial situation.

When you're ready to purchase, apply today and a lending advisor will help you navigate your options. Checking your options won't impact your credit score.

Frequently Asked Questions

These are the questions buyers ask me the most about purchasing a business.