Guide to Getting an Existing Business Purchase Loan

If you are considering obtaining a business purchase loan to buy an existing operation rather than starting your own company, you will be subject to different criteria than an individual looking to start a business from scratch. The good news is it can be easier to get a loan to buy a business than to start a business. This is particularly true if the business you are purchasing has a strong financial profile. However, the large amount of capital required for this purchase can prove challenging.

Contribute your Own Equity

Lenders want to see you are personally invested in a company prior to extending you financing. Downpayments are a requirement of loans because they demonstrate to a lender that you are vested in the business. Further, having a large sum for a down payment is a sign of financial health on your part. Perhaps most importantly, by providing your own equity to pay for a portion of the business, you will lower the amount of financing you need to obtain from a lender. Most banks like to see at least 10 percent down when you are starting a business. When you are purchasing an existing business, this figure may be as high as thirty percent.

Seek Investors

If you do not have the cash to supply a large down payment yourself, consider taking on investors in your new business. You can look to a number of sources for assistance, starting with what are called "angel investors." These individuals are friends or family members who will have a stake in your business in the future. They are typically the first to contribute and the last to be paid back. In exchange for their goodwill, angel investors can be offered much higher equity stakes or dividends than other investors who jump in on the deal later down the line.

Refine a Business Plan

Even though the business you are purchasing has a business plan, you need to show you have key models to put in place to refine it. Indicate the areas where you will keep operations the same and the areas where you will change business practices. On your new version of the existing business plan, be sure to include information on your experience and what qualifies you to own the business. Finally, point out areas where profits can be expanded beyond their current levels. If you do not expand profits, you will not likely generate a high return by purchasing the business.

Offer Collateral

You may need to supply additional collateral beyond your down payment to secure a large business loan. If you own a company, the assets of the company can be used as collateral for the new business or the merger. It is best to avoid placing personal assets as collateral on a business loan. If anything should happen to the business, you will want to ensure your personal assets remain protected. However, if you must place a personal asset as collateral, it is another option for you.