Financing Buying An Existing Business with Traditional Banks or SBA Loans

Financing buying an existing business with traditional bank loans or SBA loans should be a last resort.  Of course if this is the path you wish to take, you must do what you can to secure the ability to get this type of loan as far in advance as possible.

Unless you have a good relationship with your bank of choice, this could be difficult. It's kind of a Catch 22 situation. You need the loan approved to show proof of funds to get further important financial information from a seller. At the same time the bank wants you to show them the important financial information to give you the loan approval.

Financing Buying an Existing Business with a Traditional Bank Loan

Here is a quick list of things that will make financing the buying of an existing business with a traditional bank financing a possibility:

• Lots of personal collateral that equal more than the amount of the loan you need
• Excellent personal credit
  
• Loads of experience managing or previously owning the same type of business
  
• Ability to put down 20% or more of the full purchase price
  
• Business being purchased needs to have 3+ years of tax records to support the purchase price
  
• Involvement of real estate in the purchase of the business
• Purchasing a franchise
  

Financing Buying an Existing Business with an SBA Loan

The SBA will guarantee up to 85% of a 7(a) SBA loan approved by the traditional bank that is an approved SBA loan lender. What that actually means is that the bank will get paid in full no matter what. It also means that you guarantee 15% and the SBA will make you pay every dime you have into their guaranteed 85% before they kick in whatever remains.

Don't be fooled into thinking an SBA loan will protect you from bankruptcy or that the government is giving you a grant. It's a true to form loan.  Besides the above bank criteria, an SBA loan will also have the following extra criteria:

• Further scrutiny into your business management/ownership background
  
• Further scrutiny of the tax records for the business you are buying
  
• A lot more red tape and a very drawn out process that will take 30+ days to get through will the possibility of still getting denied

The good news is that if you can secure an SBA loan, it will often have the option to be stretched out longer than a traditional business loan. We are talking about a 7 to 10 year range. In addition, you will also have the peace of mind that the business you purchasing has a solid backbone to it.

Interest rates are currently between 2.25% to 4.75% over the prime rate. Not great but better than nothing. BUT they are also "floating rates" meaning that they go up and down depending on the change in prime rate.

There is also an Express version of this loan that has less documentation involved. It has an SBA guarantee of only 50% of the loan. It is quicker because the bank does the main approval for the loan, but it is tougher to get.

Sometimes a seller will have already found out that the business he is selling is SBA loan eligible. It never hurts to ask if this research has already been done for you. In general, most franchise businesses are already on the list of SBA approval.

Financing Buying an Existing Business- Better Options

A far better approach than dealing with the banks and SBA loans is to deal with non-traditional lenders that specialize in financing buying an existing small business. Better yet, getting the seller to finance the deal is the way to go. Either way though, you are going to need a down payment. Plan on having 20%+ to put down for a non-traditional lender and 40%-70% for a seller financing situation. You can also do a combination of seller and lender backed financing.

Financing Buying an Existing Business- Getting Help

Your business advisor, accountant or lawyer are a good source of help in finding the right non-traditional bank lender and options to secure the down payment portion of a purchase. I would also be happy to help you out in this area through the pool of lenders I have relationships with.