Business Acquisition Loans 2018: The Definitive Guide

So…

You’re looking for a loan to buy a business?

Yes, there are plenty of articles on the ‘net…

Most of which might tell you that good credit is required…

… and then there’s a lot of fluff…

With no real info.

So uncool, right?

Do you want actual information that can help you decide if a business acquisition loan is right for you?

Read on…

Types of Business Acquisition Financing

There are several ways to fund a business purchase

Some are:

  1. Unsecured (private) acquisition loans
  2. Secured (SBA) loans
  3. Using a home equity loan
  4. 401k funds

Let’s go over each of these…

Private Financing to Purchase an Existing Business

Did you know you may be able to borrow up to $200,000 to finance a business purchase?

It’s true.

Not only that…

…but the loan is based on what a good guy (or gal) you are… meaning there is no underwriting on the business itself.

It also means:

  1. No down payment requirements
  2. No collateral is needed
  3. Fast processing times – funds typically in a couple of weeks or less

Now…

… “good person” doesn’t mean being kind to children and animals…

(… well… not when you’re asking to borrow money anyway…)

Here’s what’s needed to qualify for a loan to finance your business purchase:

  • Minimum credit score (FICO) of 700 – preferably 720 or above
  • 35% Debt-to-Income Ratio (DTI) – your current job or business and/or spouse’s income are considered
  • Your revolving credit utilization (how much of your credit card limits are being used) should be 60% or less

Note … lenders get “fussy” when you’ve got more than $65,000 in credit card debt, so…

… if you’ve got a $200,000 credit limit and you’re using $100,000 of it…

Even though your “ratios” will look good, lenders may be a little nervous about extending you additional credit. As you get much past $60,000 in debt, lenders will want your utilization to be more in the 30-40% range.

Unsecured loans to buy a business typically have maximum terms from 5-7 years with no prepayment penalties and can be set up as either a term loan or a line of credit.

Now…

…here are the negatives…

  • Interest rates are a typically a little higher than the very “cheapest” options in the marketplace. They can range from 6-12%
  • There are origination fees to these loans

The bottom line… private acquisition loans are a little more expensive than an SBA loan… but without all the headaches.

SBA Loans to Buy a Business

Do you know about the Small Business Administration (SBA)?

The SBA allows banks to make loans to small businesses while limiting their risk.

In fact, on SBA loans, the government is guaranteeing between 50 and 85% of the loan.

Add to that the required down payment of 10-20% and the lender is hardly taking any risk at all.

Since SBA lenders don’t have much of their own money on the line, repayment terms are long (up to 10 years) and rates are low (6-9%).

That’s all good… but here’s the bad:

  • The application package for an SBA loan is a BEAST. The package you must put together is huge. You’re in for hours upon hours of work.
  • Most SBA loans are declined
  • It can take months to get an answer on an SBA loan… and even when the answer is yes… you’ll still have to twiddle your thumbs waiting for it to process
  • Many SBA loans have a blanket lien. That restricts future borrowing ability.
  • Most SBA loans have variable interest rates

With all that said… SBA loans are the least expensive loans that exist to buy a business with.

So… if you have hours to burn filling out papers and a lot of patience, you may find the process to be worth the hassle.

Are you feeling lucky?

Can You Buy a Business Using Home Equity Loans?

If you have equity in your home, you can tap into that equity for a business purchase.

A better question…

… should you put up your house to finance a business purchase?

If you don’t pay, you could be living in the street.

Here’s the good:

  • If you’ve got equity in your home, the income to support the payment, and good credit, it’s super-easy to borrow against your home
  • The rates are going to be low

And, just to reiterate… the bad…

…you could lose your home…

If you have an attorney, and that attorney isn’t stupid… they’ll likely advise you to avoid using personal assets like your house as business collateral at all costs.

Remember… lots of businesses fail.

You’re super-special – but the small business graveyard is littered with corpses of folks that were just as certain as you are of success.

(Be careful before betting the house…)

Can You Use Retirement Funds to Buy a Business?

There are 3 ways to use your retirement funds to buy a business:

  1. Cash out (and pay big taxes and fees)
  2. If you (or your spouse) are still employed
  3. Use a quirky program called a ROBS (Roll Over for Business Startup)

A warning:

Many experts will warn you that using your IRA or 401K to start or buy a business is a really stupid thing to do.

Let’s be serious…

If you go bankrupt, creditors cannot touch your retirement funds.

This bears repeating.

If you go bankrupt, your retirement funds are protected.

I mean, sure… you’ve got a great plan, and you’re buying a business with a track record (hopefully).

Just keep in mind, sage advice from one of America’s greatest minds…

Everyone’s got a plan until they get punched in the mouth

  • Mike Tyson

Right?

Conclusion

There are a lot of ways to fund the purchase of a business.

Be super-duper careful before risking your retirement funds or your house on a business.

Usually loans are available if you’ve got good credit.

We can help you take advantage of loans to purchase a business. CLICK HERE to get started.

 

 

 

 

 

 

 

 

 

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