How to secure a loan to buy a business

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Most people would need a loan to buy a business but the challenge often lies in securing one.

It might be easier for bigger companies with solid assets and a track record but for small businesses, the reverse is often the case.

If you are considering securing a loan to buy a business, here are a few loan options to consider and their advantages.

SBA Loans

SBA loans are most suitable for people looking for the longest repayment terms and low-interest rates. The requirements are also quite considerate compared to traditional bank loans. SBA doesn’t directly provide loans to business owners but rather connects them with other lenders with some guidelines. Their interest rates are competitive and it’s easier to get financing from them. With SBA, you can take a loan of up to $5million and have at least 10% to 20% of the purchase price as a down payment. The SBA interest rates as of May 2020 were around 7.5% to 10%.

Seller Financing

Seller financing occurs when the seller of the business provides you a loan, which can either be part of the purchase price or the full amount but it’s usually between 15% to 60% of the price. This form of financing is great because it reduces the number of loans or amounts you have to borrow eventually and it also saves you the stress of looking for financing options. Also, by financing the business for you, it shows how confident the seller is in the business, which can drive you to keep pushing to do more. There are no standard requirements to get this financing, as it depends on the specific requirements of each seller.

Family & Friends Loan

About 15% of startups in the U.S acquire loans from friends or close relatives. This might seem like the easiest way out but could also be complicated, since you’re dealing with someone close. You can acquire loans from people close to you if you have a wealthy network that can help you but you must also be careful not to ruin personal relations because of it.

To reduce the chances of that happening, formally document everything, and not dismiss any detail because you are family. You should also be careful not to mix personal and business funds whatever it takes, even if it means dedicating a separate account to the business.

Family and friends would have their terms on repayment dates and interest rates, so there’s no standard rule to this. Both parties should be clear on their terms and properly document them.

Bottom Line

Securing a loan to buy a business depends largely on you, the amount you need for the business, and how long it will take you to repay the loan. Consider all your options, including the repayment date and interest rates, and opt for the best one for you. Before purchasing any business, ensure you have a clear plan in place on how to keep it thriving, so you never get stuck.

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