It is common for entrepreneurs and business owners to pay for their new business expansion with loans from reputable lenders. It is an effective way to grow your business quickly while spreading payments over time. Your question may be how to get financing. There are certain steps you will take, depending on the type of loan you want. The application process is now more convenient than ever as online lenders make it fast and easy to learn about available loan options and apply.
Different Loan Types to Buy a Business
Establishing a long-term relationship with a lending partner you can trust may be vital to the success of your new business venture. The key to considering the different loan types to buy a business is to find the one that’s right for you. It will depend on many factors, including the business you are buying and the lender you’re comfortable working with.
Small Business Term Loans
A small business term loan will provide a lump sum of money that you will pay back based on the terms agreed upon with the lender. Traditional term loans are usually offered to existing businesses whose financial history demonstrates that they will be able to repay the loan. In other words, your business should be profitable for at least two years before you qualify. To reduce the loan cost or to qualify for better rates, you may be expected by the lender to provide a down payment. You may discover that online lenders have more appealing approval standards than traditional banks or credit unions regarding small business term loans.
SBA loans are backed by the U.S. Small Business Administration and offered through approved banks and online lenders. You apply for the loan through the bank or financial institution, and that lender gets the guaranteed portion of the loan from the SBA. Your business must be at least two years old and demonstrate healthy revenues to qualify. The different types of SBA loans have different maximum loan amounts, interest rates and payment terms. One benefit of SBA loans is that loan terms are usually better than other types of business loans, but they may have stricter qualifications. There is a chance that you might not qualify for an SBA loan if you have a low credit score, for example, but it may not eliminate you from consideration for other types of funding.
What Lenders Look at for Loans to Buy a Business
Lenders assume a great deal of risk when loaning money to small business owners. Therefore, they will request a wide variety of information from you related to both your personal finances and your business results. Every lender weighs the following factors differently.
Personal Credit History
Your personal credit history is an important factor lenders will look at when buying a business. Credit scores range from 300 to 850, with good credit being measured above 670 and excellent credit being a score above 800. If you do not know your personal credit score, make sure you find out and study your credit report for possible errors. Furthermore, if you have yet to apply for a loan to buy a business, take steps to improve your personal credit score if it is lower than about 700 by paying bills on time and monitoring how much credit you have access to manage the amount you are using.
Business Credit History
If you are an entrepreneur looking to start a business, you may not have a business credit history. It’s another reason why your personal credit score is so important. Once you are established, it will be vital that you build a solid business credit history by paying bills on time. In addition, lenders will use your business credit history in the future to determine whether to offer credit approval in the future. According to the U.S. Small Business Administration, your business credit history contains historical and registration information, industry classification, payment history and collections, and a number of accounts.
Lenders will weigh the value of your existing business when considering your ability to repay a loan. In simple terms, the business value is the total worth of your business, including tangible assets like the building, equipment and cash flow, plus intangible assets, such as intellectual property, patents, and brand recognition.
Business Revenue and Debt
When you get a loan to buy a business, lenders will analyze your ability to repay the loan by looking at your business revenue and debt. If you don’t have a business track record, you may not be able to report the minimum annual revenue some lenders require. Your current debts will be a factor since lenders decide whether you can assume even more debt to build your business.
Amount of Down Payment
Lenders will ask about the amount of your down payment. Your ability to put cash down at the time of the loan can benefit you when qualifying for certain types of business loans with more favorable interest rates and other payment terms. However, a down payment is not required for some business loans and from some lenders.
Supplying collateral is a typical requirement for small business loans. Some lenders need you to offer an asset that can be seized if you cannot repay the loan. Examples of collateral include business equipment, real estate, inventory, cash, investments, or other personal assets. If you’re using the business loan to buy a building or equipment, you may be able to offer that asset as collateral. Depending on which business loan you use or how it is structured, you may not be required to provide collateral to qualify.
Most lenders will require a business plan to show that you understand your business and can project future revenues based on facts you have gathered while creating your plan. Key components of a business plan include a company description and overview of your products and services; a summary of market research you have done and competitive analysis; marketing strategy; financial statements, and funding requests. You can find examples and templates online to help you create a unique business plan.
Can you run a business successfully? Some lenders will attempt to answer that question by looking at many factors, including your related experience. That’s not to say switching careers to buy a business will eliminate you from consideration. On the contrary, entrepreneurs with a vision for a new business can secure a small business loan even without extensive related experience. The key will be to show that you are motivated to succeed and understand what it takes to run a business.
What to Look for When Comparing Business Acquisition Loans
Here are things you should look for when comparing business acquisition loans.
Rates and Terms
If you know current market conditions, you may be better positioned to negotiate rates and terms when applying for a small business loan. First, find out if interest rates have recently gone up or down for the type of business loan you need. Then, during the application process, focus on what’s important to you and the success of your business. For example, do you need funding quickly? Do you need to stretch your loan payments over many years or just several months? Do you have an excellent credit score but little cash for a down payment? These considerations and others will have an impact on the rates and terms you can expect and accept from your lender.
Required Down Payment
Whether a down payment is required will vary based on the business loan you apply for, the amount you need to borrow, and the lender you are working with. For example, some SBA loans require a down payment, while others don’t. If you don’t have a lot of cash on hand or other assets you can use for a down payment, it doesn’t mean you can’t get a business loan.
Minimum Credit Score
Some lenders require a minimum credit score when considering business loan applications. Your personal credit score is generally based on a scale of 300 to 850, and every lender will have different criteria for where your score needs to be. You can expect to qualify for better loan terms if your credit score is more than 680.
A lender’s reputation may be just as important to you as your reputation is to them. You may request references or testimonials from satisfied customers. Use word-of-mouth referrals and online reviews to gather the information that will help you decide which lender is right for you.
Lender Customer Service
Lender customer service is important since you will likely be doing business with your lender for at least several months if not years. Therefore, choose one that strives to make your experience positive with responsive customer service.