The Do’s and Don’ts of Applying for a Loan to Buy a Business

If you’re looking to purchase an existing business, securing financing should be one of your top priorities. Getting approved for a small business acquisition loan allows you to come to the negotiating table ready to make a competitive offer. However, the business loan application process isn’t always straightforward.

Here is a simple list of what to do and what to avoid as you move through this process!

Do: Check Your Credit Rating

Lenders will thoroughly analyze your personal financial history before approving a business acquisition loan. Before applying, order copies of your credit report from Experian, Equifax, and TransUnion to correct any errors that hurt your score. Pay all personal bills on time going forward and pay down balances well before applying. Build savings to put at least 30% down on your business purchase.

Don’t: Apply for New Credit Ahead of Time

A big mistake is taking out new credit cards or loans right before seeking a business loan. Each application triggers a hard inquiry on your credit file. Too many new inquiries make lenders skeptical of your plans for financing and ability to handle repayment. Only apply for the necessary credit the lender requires during the process.

Do: Have Detailed Financial Records for the Target Business

To qualify for financing, you need comprehensive financial documentation on the past performance and current operations of the business you want to buy. Collect tax returns, income statements, balance sheets, sales figures, profit/loss details, and other records for the last 3-5 years. Thoroughly analyze the numbers to establish an accurate valuation before making an offer. Being organized shows the lender you’ve done due diligence.

Don’t: Hide Personal or Business Problems from the Lender

Full transparency is mandatory when seeking a loan. If you have past bankruptcies, foreclosures, legal judgments, tax issues, or other problems in your history, disclose them upfront and explain how you’ve moved forward responsibly. Also, disclose any weaknesses or risks for the business you want to acquire. Hiding anything guarantees rejection.

Do: Make a Sizable Down Payment

The higher the down payment you can offer on a business purchase, the better. Most lenders want to see at least 30-50% down to consider a loan less risky with enough collateral. Some may only require 20%. But anything lower gets increasingly harder to secure. Save as much as possible for this down payment before approaching lenders to improve the chances they’ll finance the rest of the acquisition cost.

Don’t: Provide Skewed Business Valuations

Never manipulate your projections, exaggerate profit potential, or misrepresent aspects of the business to justify a higher valuation. This is financial fraud. Lenders will heavily scrutinize all numbers, projections, and records you provide to determine their valuation. If you claim the business merits a specific offering price or loan amount that can’t be backed up objectively, your credibility tanks along with your loan eligibility.

Do: Seek Financing from an SBA Lender

A great option for financing a business acquisition is using a Small Business Administration loan backed by the government. The SBA has a plethora of loan and assistance programs for buyers to help cover down payments, closing costs, working capital, and more – often at lower rates or with less stringent credit requirements than traditional bank loans. Connect with an experienced SBA lender early on.

Don’t: Wait Until After Making an Offer

Huge mistake – do not place an offer to purchase the business before lining up financing first! A signed letter of intent might convince the seller to take the offer off the market, but if your loan is later denied you breach the contract. Secure an approval letter from the lending institution before making any binding offers. This letter confirms you qualify for the necessary loan amount to cover the offered purchase price.

Do: Be Ready to Personally Guarantee the Loan

Understand that most business acquisition loans require a personal guarantee. This makes you personally responsible for repayment if the business fails or defaults. Guarantees assure the lender they can still collect by acquiring personal assets like investment accounts, real estate equities, etc if the business can’t repay as expected. Be fully prepared to guarantee before seeking financing.

Don’t: Neglect Consulting a Business Broker Early On

Working with an experienced business broker gives you an invaluable ally when seeking financing. They have deep connections with lenders plus insight on documentation required for loan approval. They assist with accurate valuations and projections. Brokers facilitate negotiations, contracts, and financing plus essential services like appraisals, legal advice, and credit optimization. Engage a reputable broker before approaching lenders.

The Broker to Sell My Business can also advise on funding options and provide services to thoroughly prepare your loan application – improving the likelihood of smooth approval.

Do: Optimize All Aspects of the Business Before Applying

Review the financials, operations, management, technologies, offerings, and growth potential for the business with an eye for optimization. How could you streamline workflows, amp up efficiencies, expand products or services, reach new markets, etc? Detailed plans for scaling revenues to present the best possible picture of profit potential to the lender and convince them the acquisition is a strategic growth play primed for loan repayment.

Don’t: Acquire BY a Business Beyond Your Background

The lender must see your credentials align strategically with the business you want to acquire. The operations, market landscapes, client profiles etc should all be within the scope of your core experience, education, and skill sets. If a restaurant owner tries acquiring a tech firm or a dentist buys a farm, lenders get skeptical. Show how your know-how directly translates to growth with the new company.

Do: Consider Both SBA and Non-SBA Loan Options

Alongside the SBA, expanding your options among traditional banks, credit unions, and alternative and online lenders can open more avenues suited to your deal. The specific purpose, the amount required, collateral available, etc determine what type of lender offers the best fit. An adept where to sell a business broker guides weighing loan choices. With options from multiple institutions, compare terms to find the most advantageous solutions.

Don’t: Accept Unfavorable Repayment Terms

Just because a lender approves your business acquisition loan doesn’t mean you must accept the offer. Every term from rates, length, collateral, and repayment schedules matters. If anything seems unfavorable, keep hunting for a better loan package even if it takes more time. Don’t get pressured into accepting repayment terms that could jeopardize the business.

Conclusion

Applying for a business acquisition loan requires meticulous preparation and diligence. When looking for money, follow the rules and avoid mistakes. Put together a complete application, and talk openly with lenders and advisors, like brokers.

Sell My Business USA stands out as the top broker for businesses in the USA. Trust us for expert guidance when applying for a loan to purchase a business, ensuring a smooth and successful transaction.

Related article: incredible planets