What Is a Business Loan?
A business loan is a form of business financing that you can obtain from a commercial bank, private lenders, credit unions, investment bankers, and other sources. People take out business loans to buy an existing business or merge with another entity. The funds can be used for various purposes, including buying equipment, hiring new employees, expanding your office, marketing, advertising, debt consolidation, and more.
Lenders typically offer a business loan as a lump-sum payment, or they might provide you access to lines of credit. You enter an agreement with the lender, where you promise to repay the debt over a certain period, along with the interest and additional fees. When the loan is being negotiated, the borrower is also told whether they need to make weekly or monthly payments until the loan is fully returned.
Business loans are of two different types: secured and unsecured. If you opt for a secured loan, you need to provide collateral, including an asset that the lender can possess if you can't repay your loan. The collateral assures the lender that they won't lose their money, and it can include property, equipment, or stocks.
On the other hand, an unsecured business loan doesn't require collateral. However, the banker or lender might require you to sign a document that guarantees you will be liable if the business isn't profitable or doesn't make enough money to repay the debts.
Should You Buy a Business, or Start One From Scratch?
Starting your own business always seems like the best thing to do, but you can’t guarantee whether it would be a successful business or not. If this is the first time you are stepping into the entrepreneurial world, it might take you a long time to set things up properly, and there are more chances of making mistakes. On the other hand, you can choose to buy an existing business and manage, improve, and grow it.
You may also be at a point in your business journey where you’d like to expand your portfolio, and merge with or acquire a target that has considerably higher value. If you are interested in exploring M&A targets in the USA, you can explore BusinessesForSale.com’s exclusive space for high-value businesses.
Established products and services
When you buy an existing business, you will also acquire its products and services already released in the market. Therefore, you won't have to spend much time or effort in research, marketing, advertising, and other processes.
For example, if you buy a beverage business with a significant market presence and promising sales figures, you can be sure that customers will continue to buy your products, especially if you maintain the same formula, ingredients, and production methods.
To find out how a certain business's products and services are performing in the market, you should conduct your own due diligence before making a decision.
Time is on your side
If you think about starting a new business, you will have to climb mountains every day and start things from scratch. It would take you a couple of months to register your business and gather all the resources, equipment, raw materials, and other things you need to launch it. On the other hand, buying an existing business would have most of the components in place.
Your products and services will be in the market already, but you will also be able to cut down on the initial steps of establishing your business. If you consider starting a new business that sells custom T-shirts, you will need to purchase equipment for printing, find a supplier, buy or rent a space for your store, and set up an online platform.
You will have to hire new employees, train them, and develop regulations and SOPs for the business. This is a lot of work and requires a significant amount of time.
Existing businesses usually already have installed equipment, trusted suppliers, a managed store, trained and experienced employees, and a customer base. Therefore, you will be able to save a lot of time, and it would be easier for you to understand the business structure.
Another reason why you might choose to buy an existing business is because it likely has a stronger brand identity, which also translates to higher brand loyalty.
A strong brand image is vital for selling your products and services to a larger customer base, and if you already have that, you’ll avoid multiple challenges. If you have the business acumen or the marketing experience, you will be able to take your sales figures to the next level.
Start-ups and small businesses may need to struggle and work very hard to grow their brand in a competitive marketplace, and it can be even more difficult to penetrate the market as a new brand. This way, you can navigate through the introductory stages and become the owner of a flourishing business.
When it comes to brand image and loyalty, you should also consider investing in a franchise. You can explore profitable franchise opportunities on our site.
Ease of securing financing
A strong benefit of buying an existing business is that it helps you secure a business loan much faster. It can be quite difficult to convince lenders to provide you with capital if you have a new business, especially if you don't have anything to offer as collateral. Although it still requires research, obtaining a loan to buy a business isn't as extensive and strenuous as the process for start-ups.
Knowing the Value of a Business Before You Take Out a Loan
If you are confident that you’d like to purchase a business, the first thing to do is understand the business’s value, which often determines its price tag. There are various ways to conduct a valuation, including hiring an investment banker, analyzing the brand's financial performance, evaluating sales figures, and using different methods to understand financial figures.
Thankfully, if you don’t have the means to hire a valuation expert, BusinessesForSale.com offers a free valuation tool that produces a comprehensive and pragmatic valuation of the business you are interested in. If you’d like to do a bit more research on the valuation process, you can read our guide on valuing a business.
Checklist Before You Start Assessing Your Finance Options
It is important to consider several processes before you start applying for different term loans and lines of credit. We’ll go through some of them below.
Understanding the market
First and foremost, you need to understand the market you will venture into. Doing so is crucial, as it will uncover risks, opportunities, and conditions that you’ll be up against. Knowing the market, you’ll operate in will highlight demand, who your competitors are, what your marketing strategy will look like and how you’ll incorporate this research into your business plan.
Your down payment
The next thing you need to consider is the down payment, which is a requirement for any business loan, regardless of which type of lender you go to. As the borrower, you won't just get money if you present the company's business valuation you are planning to buy. The amount for the down payment depends on various factors, including the type of loan you have applied for and the amount you are asking for. In some cases, the type of business you want to buy also impacts the down payment required.
Gathering funds for interest rates
Whenever you secure a business loan, your weekly or monthly payments won't only be to repay the amount you have borrowed. You also need to pay the interest levied on the business financing amount.
On average, the interest rate for business loans ranges between 2.5% to 7%. The exact rate is determined according to several factors, including the type of business, the collateral you offer, and the type of loan you have opted for.
You have to make sure you can make these payments, including the interest.
Checking credit scores
Your credit score will play a significant role in the business loan process, and you will need to check the acceptable credit score for business financing in your state. We’ve offered some credit score facilities (and other credit management and repair sites) in different states below:
These are some of the top credit score and repair companies that you can get in touch with to find out about a suitable credit score to apply for business financing.
Calculating a debt-to-income ratio
You’ll need to find out your debt-to-income ratio, since it is a valuable metric in determining what type of loan you’ll receive. A DTI measures how much of your receivables are directed towards repaying your debts. This value is what lenders use to determine whether you should get a business loan or not.
You can find out what terms will be offered to you by the lender, and it will help you make a sound decision. If your gross monthly profits are $50,000, and you use $5,000 for the loan repayments, your debt-to-income ratio would be $5,000 / $50,000 X 100 = 10%. This translates to a lower debt-to-income ratio, which increases your chances of getting a business loan with good terms.
Cash reserve for closing costs
Before you choose a lender and agree to one of the loan options presented to you, you should also set aside some money for the closing costs, which is the amount you need to pay to open your loan account and seal the deal with your lender. Having a cash reserve will help you save time and get the ball rolling faster.
Drafting a business plan
One of the most important things to do before you start applying for business financing is to draft a business plan, which lays out the complete blueprint for lenders. Since you are interested in buying an existing business, your business plan will include the full details of the business you are looking to buy.
The business plan should contain your executive summary, company description, market analysis, and other specifics.
Negotiating the best finance terms
Once you have started applying for term loans, the lenders will evaluate your business plan, credit score, and other information to determine whether you are eligible for a business loan.
Next, they will offer you the terms on which you can receive the money, and if you think they aren't fair, you can negotiate them to get some form of relief. For instance, if you think you are getting a high-interest rate, you should try lowering it rather than having to make hefty monthly payments.
Funding Options You Can Consider
Let's have a look at some of the different types of funding you can choose in your business buying journey.
As mentioned earlier, you can obtain unsecured loans without the requirement of collateral. However, the lender might ask you to sign an agreement claiming personal liability if your business fails to pay back the debt.
- Colorado: OnDeck
- Idaho: Nexus Financial Inc.
- Massachusetts: UniBank
- Nevada: Sun Loan Company
- Utah: Bank of Utah
- Washington DC: Abel Funding
A commercial mortgage is a business loan that a company can use to buy commercial property, specifically for business purposes.
- Colorado: Bank of Colorado
- Idaho: CREFCOA
- Massachusetts: AvidiaBank
- Nevada: One Nevada Credit Union
- Utah: Popular Commercial Lending Group Inc.
- Washington DC: EagleBank
Asset financing is a business loan given against non-physical assets, such as investments, bank deposits, shares, bonds, and other assets.
- Colorado: Apple Capital Group
- Idaho: Idaho Asset Network
- Massachusetts: Berkshire Bank
- Nevada: Wolters Kluwer
- Utah: Celtic Bank
- Washington DC: Access Business Finance
Other Sources of Funding You Can Explore
Apart from taking out a business loan, you can also consider other sources of business financing to gain access to capital. Let’s have a look at some:
An angel investor is a person who invests in startups and small businesses to help them get off the ground, and they receive equity against it. They usually fund companies that don't normally get funding from other sources.
- Colorado: Angel Investment Network
- Idaho: Crunchbase - list of angels in Idaho
- Massachusetts: Boston Harbor Angels
- Nevada: AngelNV
- Utah: Grow Utah
- Washington DC: Citrine Angels (caters to female entrepreneurs)
Apart from a business loan, you can also consider a business grant, which gives you money without any requirement for paying it off and without any interest charged. Small business grants can be used to fund certain portions of the business. It is uncommon to find a business grant that will fund the acquisition of a business entirely, but they are useful when funding growth of certain components of a business.
You can explore multiple grants available to you in our small business grants guide.
Government-guaranteed lending scheme
A government-guaranteed lending scheme allows you to get a significant amount of cash to run your business in a time of crisis. The funding comes without any conditions or interest and can be used to buy and run an existing business.
Friends and family
One of the easiest and most effective ways to get business financing is to ask your friends and family to invest in your business plan. They will be more receptive and understanding than a banker or lender, and they will also provide you with more amicable terms. Provided they have the capital to do so, it is important to draw up a contract that can be signed – in case there are any unforeseen risks on the horizon.
A venture capitalist, or VC, is an individual that offers funding to businesses in exchange for equity or a stake in the company. Usually, they ask for a bigger share, but they also have more money to give out.
- Colorado: Foundry Group
- Idaho: Crunchbase – list of investors in Idaho
- Massachusetts: Underscore VC
- Nevada: StartUpNV
- Utah: AlbumVC
- Washington DC: Crunchbase – list of investors in Washington DC
Equity financing involves raising funds for the business by selling its shares. This method is adopted by companies that need to fulfill their immediate goals or take care of their expenses.
You can avoid taking out a business loan by using your own funds. This doesn't necessarily mean that you need money lying around to funnel into your acquisition. You might have a certain asset with the same or higher value as the amount of money you need to buy an existing business, and you can sell it off. This way, you won't have any debts to worry about.
Finally, banks are one of the most popular choices for loan options, especially when you are going to buy an existing business. You can share your business plan and other specificities with them, and they can offer you a loan with certain terms that you can accept or negotiate.
- Colorado: Vectra Bank Colorado
- Idaho: Bank of Idaho
- Massachusetts: UniBank
- Nevada: Nevada State Bank
- Utah: Central Bank Utah
- Washington DC: Washington Trust Bank
Get Your Funding and Seal the Deal
Now that we’ve given you a comprehensive list of funding options available to you, we hope that you can make a more informed decision when it comes to funding your business buying journey.
Although you have multiple avenues of capital to tap in to, it is crucial that you conduct appropriate research on these options, and that you understand your financial limitations and ensure you act responsibly when managing your debts.
Nonetheless, there has never been a better time to pursue business ownership, and we wish you every success on your new journey. If you’d like more support, or you want to connect with someone from our team, feel free to contact us.