Guide: How to Get a Loan to Buy a Business
Buying a small business is one of the most important financial decisions you can make in life. When you buy a business, you’re taking a financial risk in the hopes it will pay off in the future. That’s why getting a loan to buy a business is something that needs to be well researched in order to minimize the risks.
When you decide to buy a business, one of the first things you have to do is secure your financing. The amount of information available is overwhelming, and not all of the information will show you how to buy a business with no money down.
We’re going to take a look at all the ins and outs of buying a small business, such as what to do before you buy a business and how to get a loan to buy a business. We will also show you whether or not there’s a legitimate way to buy businesses with no money.
Before we discuss the particulars on finding a loan to buy a business, we need to look at the groundwork that must be laid first in order to give you the best chance of securing financing.
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How to Buy a Business: Before Seeking a Loan to Buy a Business
Before getting a loan to buy a business, you must be prepared. According to Smallbusiness.chron.com, you must negotiate the purchase price before you can think about financing options. Once you have a price in mind, you can begin to choose the best way for you to buy a business.
If you’re trying to figure out how to buy a business with no money down, one option is to negotiate terms with the person or entity selling the business. While it’s rare that a seller will be willing to finance 100% of the purchase price, it’s not unheard of.
According to TheSelfEmployed.com, if you find a seller who really needs to sell, it may be possible to buy a business with no money down. There are a few ways sellers will be more motivated to work with you, such as the confidence that you will be successful due to previous experience and assurance that you will pay them back in full in a shorter period of time.
If a seller is willing to finance you 100%, make sure to check the financials of the business and confirm that it’s solvent. By performing your due diligence, you will minimize your risk when you buy a business.
Another area to take a look at before you seek a loan to buy a business is your personal finances and credit history. Whether you are able to secure seller financing or you need to go a more traditional route to buy businesses, the people you work with will want to know that you are a good risk.
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How to Buy a Business: Other Non-Traditional Financing Options
In your search for how to buy a business with no money, it’s important to realize that all businesses take some kind of capital to start. While it might not take any money out-of-pocket for you to start, the money must come from somewhere.
There are a few options for buying a small business that may not take much money upfront, but each type of financing carries its own risk. In your quest to buy businesses, you must evaluate the risk against the possible reward.
Let’s take a look at two ways to buy businesses that don’t involve borrowing from a bank: Rollovers for Business Start-Ups (ROBS) and Home Equity Lines of Credit and Home Equity Loans. If you’re interested in how to buy a business with no money down, these are probably your best options, if you fit the criteria.
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Rollovers for Business Start-Ups (ROBS)
If you’ve built up money in a retirement account such as a 401(k), traditional IRA (not a ROTH), 403(b), or SEP, then you may be able to take out money to fund your business. There are some benefits to using your own money to buy a business:
- No interest or debt
- Faster funding than a traditional business loan
- Avoids taxation and penalties on retirement funds
- Access to money regardless of credit scores or history
According to SBA.gov, there are also a few downsides to using ROBS:
- Retirement savings are put at risk, especially if the business fails
- IRS scrutiny is increased
- Fees associated with administering the arrangement
If you have less than $50,000 in your plan, it may not be worth the fees to use your own money to buy a business. Also, your retirement account must be from a previous employer, as most employers will not allow you to roll over funds if you’re still working for them.
Home Equity Lines of Credit and Home Equity Loans
Approximately one-fourth of small-business owners have used home equity loans to finance their businesses, according to NFIB.com. There are several advantages to using home equity lines of credit and home equity loans to buy businesses:
- Less expensive since your home is used as security
- Business assets are not put at risk
- Flexibility to use the money how you need to, rather than having lender restrictions
As with all financing options used to buy businesses, there are risks associated with using your home equity:
- Your home is at risk if you fall behind on payments after you buy a business
- Possible prepayment penalties if you sell your home before your loans are paid in full
Fees can include closing costs and annual fees, as well as possible prepayment penalties and appraisal fees. If you’re looking for how to buy a business with no money up front, the fees may still be worth it. Unlike ROBS, home equity loans require you to have a good credit score and financial history when you’re buying a small business, as with any other type of loan.
Most of the time you will need 20% to 30% equity in your home if you’re buying a small business using home equity lines of credit or home equity loans. If you’ve only recently bought a home, this will not likely be an option.
These are your best choices for how to buy a business with no money down.
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How to Buy a Business: Getting a Loan to Buy a Business
If you prefer to buy businesses using more traditional means, then you’ll need to work with a lending institution. There’s a lot of information on how to get a loan to buy a business, but it’s a fairly straightforward process.
To buy businesses using lender financing, you can get:
- SBA loans
- Conventional Bank Loans
Buying a small business through traditional financing is similar to securing other types of loans. As you look at how to get a loan to buy a business, you must be prepared.
Several pieces of information will be needed when you’re buying a small business no matter what kind of lending institution you use. In order to be considered for a loan to buy a business, most lenders will want:
- Basic personal information
- Resumes that highlight your relevant business experience
- Credit reports and financial histories
- Solid business plans
- Bank statements
The requirements for securing a loan when buying a small business will vary, but all lenders must minimize their risk by verifying you are in a good position to handle the financial responsibilities assumed when you buy businesses.
According to Nerd Wallet, you can find loans to buy a business from several places such as banks, nonprofit microlenders, and online lenders. Loans for buying a small business can also be found through community banks and credit unions.
Small Business Administration (SBA) Loans
SBA loans are guaranteed by the federal government and are for people buying a small business who may have trouble getting a conventional bank loan. The most common loan used for people to buy a business under this program is the general small business loan.
If you’re going to buy businesses via an SBA loan, they recommend you prepare by:
- Checking your credit
- Determining your financial needs
- Gathering information
When you’re buying a small business using an SBA loan, you are required to have collateral or a personal guarantee. There are also government qualifications for SBA-backed loans such as size requirements, according to Inc.com.
Conventional Bank Loans
If you qualify for a conventional bank loan when you’re buying a small business, then you go through the same process as you would for any other loan. The government is not making a guarantee as it does with SBA loans.
One of the benefits of using conventional bank loans when you buy businesses are low-interest rates. If you have good credit, this type of loan may benefit you even though the lender may require as much as 20% to 30% down and collateral.
Another reason to use a conventional bank loan when you buy a business is that they don’t have “stringent use terms that SBA loans do,” according to BusinessNewsDaily.com. The approval process is also faster than with SBA loans, but they usually have shorter repayment times. Depending on your goals when you buy a business, this might be the best choice that carries the least amount of personal risk.
Trying to figure out how to buy a business with no money can be tricky, but it’s not impossible. Even if you buy a business using a Rollover for Business Start-Ups (ROBS) or utilize your home equity, there will be fees involved at some point in the process.
The important thing to keep in mind when buying a small business is to perform your due diligence. If you want to be an entrepreneur and buy businesses, you have to be savvy from the beginning when you’re selecting a business to buy, all the way through to securing the financing.
Remember, the loan you sign for when you buy a business has the power to set you up for success if you choose wisely.
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