Businesses large and small struggle with how to get finance to buy a business. When a business buys employees or takes on new clients, expenses rise. To pay for the day-to-day expenses of running a business, most take out business loans, specifically for acquisitions. In this article, break it down to how to get a business finance loan in three steps:
Step One: Understand what potential lenders are searching for in terms of your company’s assets and liabilities. Your company’s assets include its paid-in capital, inventories, goodwill, accounts-receivable, capital structure, and the intangibles that comprise your business enterprise. Your liabilities consist of the inventory you keep on-hand, your current accounts payable, your current accounts receivable, and your short-term and long-term debts. As you can see, your assets and liabilities should be reviewed to understand both your net worth and the amount you need to borrow.
The next step is to determine how much you need to borrow. This calculation will depend on your net worth and the value of your acquired business. Many potential lenders will require you to submit copies of your financial statements, including your income statement, balance sheet, and cash flow analysis. Additionally, the lender will want to know about your prior acquisitions and any debt owed to others. This information will help the lender determine your ability to repay the loan.
Once you have all of this information submitted to prospective business acquisition lenders, the process of how to get finance to buy a business starts. The lender will assess your personal credit score and determine if you are a good risk. Your personal credit score can be adversely affected by your inability to pay accounts on time. In addition, if your business credit score is below the business credit score standard, you may not qualify for a loan. To obtain a business credit score that meets the approval of a number of prospective lenders, you can hire a business credit specialist or a certified public accountant.
Most business acquisition loans are not cash loans. They are referred to as commercial bridge or business line of credit loans. The terms are more restrictive than standard financing because the interest rates are typically a bit higher. Also, many lenders require borrowers to have collateral security, such as real estate or an existing line of credit.
How to get finance to buy a business is very similar to how to get term loans. You can use an existing business as collateral for a term loan. Many banks offer unsecured business lines of credit. However, for larger companies, obtaining an unsecured term loan may be difficult because of financial difficulties. Lenders also commonly charge very high interest rates for these types of financing.
How to get finance to buy a business is also possible through cash flow conversions. Cash flow conversions are typically used by first-time entrepreneurs who do not yet have significant earnings from their existing business. Cash flow conversion allows new owners to convert their current cash flow from operations to working capital in a short amount of time. In most cases, this funding option requires the purchase of another business. The payment made on this second property is then used as the down payment on the initial venture.
The best business acquisition loan and best business purchase loan options are those that have the lowest interest rates and best repayment terms. In most cases, business owners opt for smaller loans, so that monthly payments do not eat too much of their cash flow. When looking for funding options, business owners should shop around for the best value.