How To Get A Best Loan To Buy A Business In 4 Steps

How To Get A Loan To Buy A Business In 4 Steps

If you’re interested in entrepreneurship, you don’t always have to start your own business from scratch. Sometimes the opportunity presents itself to buy an established business, and if it’s right for you, it can be a great decision.

However, established businesses come with a price. Unless you have a large pile of cash, you will probably need to learn how to get a loan to buy a business. Here’s how.

1. Check your eligibility

In many ways, getting a loan to buy an established business is easier than getting a business startup lon. As long as it makes a profit, the success of the business has already been proven, after all. The only new thing coming into the equation is you.

Lenders will want to see that you have good credit. The exact credit score you need to get a business purchase varies by lender, but in general, a score of at least 680 will give you the best chances of approval.

Lenders also want to see that you have experience in the industry of the business you are buying. If you’ve been a florist all your life, for example, getting a business acquisition to buy a structural engineering firm can be difficult. Be prepared to demonstrate to lenders how you have worked in the industry in the past.

Finally, lenders will want to understand your personal finances – how well you manage your own finances can be an indication of how well you’ll run your business. Lenders will also expect a down payment of between 10% and 30% of the purchase price. If you have run other businesses in the past, lenders may also want to see documentation of your business ownership history.

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2. Collect the required documents

When preparing to apply for a business acquisition loan, it is essential to put together an application packet of all the documents that lenders may ask for. This will help streamline the application process and make it easier to find your documents if you are submitting an application with multiple lenders.

Lenders will typically need these documents to assess your personal finances and past business history:

• Personal bank statement
• Two years of previous tax returns
• Financial statements for any other businesses you run
• A list of personal debts, including the amount owed, monthly payments, and payment dates

Since you are buying an existing business, you will also need to collect documents from the current business owner. These documents are sensitive because they contain financial details, so you may be required to sign a non-disclosure agreement (NDA). At the very least, make sure you collect these documents from the owner:

• Cash flow statement
• Profit and loss statement
• Business Balance Sheet
• Two years of previous tax returns
• Business bank account statement

Asking the current owner for these details may seem like a hassle, but remember: this is a financial transaction and to make a good business decision, you should know these details as well. You want to know in advance if it is a profitable business.

Once you have this information in hand, you’ll need it to create some new documents of your own to go with your application packet:

Business Plan: If you plan to change anything or run it as before, make sure it is written here.
Letter of Intent (LOI): This letter tells the lender that you are formally considering buying the business and that you are in communication with the owner.
Cash Flow Projections: An estimate of how you think your cash flow will be over a three to five year period.
Professional Business Appraisal: This is an independent appraisal of the value of the business, similar to a home appraisal before you get a mortgage, and is one of the most important documents.

3. Choose a business acquisition loan

Once you’ve got the numbers and you’re confident of getting a to buy a business, the next step is choosing the right financing product for you.

Online Business Term Loans

Online lenders offer small business owners a variety of products, including term lons, that you can use to purchase a business. They generally have less stringent eligibility requirements than traditional banks. As a result, you may find it easier to get approved for a business lon with an online lender if you have less than stellar credit.

Additionally, online lenders often have a faster turnover—some can issue funds immediately on the same business day. However, the main downside to taking out online business term lons is that they come with higher interest rates than term through a traditional bank or credit union.

Traditional Business Term Loan

Traditional business term lons are issued by banks and credit unions. These lons typically come with favorable terms, including lower interest rates, but at a cost: more stringent qualification requirements than online term This means traditional bank loans may be hard to get for a business acquisition unless the business you’re buying has substantial assets and you’re a highly qualified applicant.

SBA Loan

U.S. Small Business Administration (SBA) loans are offered by a variety of SBA-approved lenders. The SBA guarantees these loas in case a borrower defaults, which makes them more attractive for lenders to offer them.

The SBA 7(a) loan is the most common SBA and can help cover the costs that come with purchasing an existing business. It can also help you purchase real estate or land, finance equipment, refinance debt and meet working capital needs.

In general, the SBA typically requires you to have a minimum personal credit score of 670 to qualify, but higher scores increase your chances of approval and receiving more favorable terms. It’s typically easier to get an SBA business acquisition than it is to get a startup business loan because lenders can evaluate the history of the business you’re buying.

Seller Financing

If the seller is willing and able, another common option is to have the seller finance the purchase of the business. In that case, you’ll need to draw up a lon agreement specifying everything that you’d expect with a bank lender: interest rate, fees, payments due dates, late payment penalties, etc.

This can be a great financing option because you’re often able to get the best rates of all, and you may not need to go through multiple rounds of applications. However, you should still expect the seller to do their due diligence regarding checking your finances and business ownership history.

4. Submit your application

The final step is to submit your application, which you can do online or in person, depending on your lender. While you may have already put together your application packet, your lender may require additional documents. Be sure to quickly retrieve any of those documents to advance the application process.

Your lender will likely request the following information during the application process:

• your name
• Business Name
• Social Security Number (SSN)
• Desired loan amount
• Loan purpose
• Business Tax ID
• Annual income

Once you’ve submitted your application, you’ll have to wait for an approval decision, which varies depending on your lon type and provider. If your lon is approved the lender will send you a loan agreement to sign before releasing your funds.

Frequently Asked Questions on Startup Business Lons

What types of startup business loans are available to me?

There are two types of business lons that lenders offer you to choose from – term lons and working capital loans. Term loans can be used for business expansion, purchase of machinery and starting new projects. This loan can be availed for a period between 1 year to 10 years. A working capital loan, on the other hand, is a short-term loan that has to be repaid within a year and can be used to pay rent, pay employee salaries, store inventories, etc.

How old does my startup need to be if I want to apply for a startup business loan?

To get a startup business loan, your startup should be a new generation or less than 5 years old. Also, the annual turnover of the firm should not exceed Rs.25 crores.

What is the maximum amount I can get as a startup business loan?

The maximum loan amount depends on the lender and other factors such as the company’s annual turnover, your credit history, etc. For example, under a Mudra loan of Rs. Loans up to 10 lakhs can be availed. Startup Business Loans.

Is a business plan mandatory to get a startup business loan?

Yes. Most lenders will ask you for a business plan when you apply for a startup business loan. Ensure that the business plan outlines clear and detailed business objectives and goals. The business plan should clearly state how the loan will be used.

Which banks offer business loans for startups in India?

Many lenders in India offer startup business lons and some of them are – HDFC Bank, Kotak Mahindra, TATA Capital, etc.

Business Loans for Startups by Government of India

There are currently over 39,000 startups in India that have access to several private equity and debt funding options. However, getting funding is a challenge when a business is just an idea or in its early stages. Also, the micro, small and medium enterprises (MSME) sector in India has only limited access to formal credit, which is why the Indian government has decided to roll out a startup business loan scheme for MSMEs and startups.

Small Industries Development Bank of India (SIDBI) has also started lending directly to startups and MSMEs instead of channeling them through banks. The interest rates on these loans are about 300 basis points lower than the interest rates offered by banks. Following are some of the most notable and popular schemes offered by the Government of India for startups and MSMEs:

Bank Credit Facilitation Scheme

Administered by the National Small Industries Corporation (NSIC), the scheme is aimed at meeting the credit needs of MSME units. NSIC has partnered with various banks to provide lons to MSME units. The repayment period of this scheme is between 5 years to 7 years but in special cases, it can be extended up to 11 years.

Pradhan Mantri Mudra Yojana (PMMY)

Launched in 2015, the scheme is spearheaded by the Micro Units Development and Refinance Agency (MUDRA) and aims to offer lons for all types of manufacturing, trading and service sector activities. The scheme provides lons under three categories – Infant, Kishore and Youth up to Rs. 50,000 and Rs. In an amount between 10 lakhs. Mudra lons can be availed by artisans, shopkeepers, vegetable sellers, machine operators, repair shops etc.

Credit Guarantee Scheme (CGS)

These lons can be availed by both new and existing MSMEs engaged in service or manufacturing activities but excluding educational institutions, agriculture, retail trade, Self Help Groups (SHGs) etc. Under this scheme Rs. 2 crores can be borrowed. Administered by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

Standup India

Launched in April 2016 and spearheaded by SIDBI, the scheme provides lons to enterprises in manufacturing, trading or services. Lons from Rs.10 lakh to Rs.1 crore can be availed under this scheme. Lons taken under this scheme can be repaid within seven years while the maximum moratorium period is 18 months.

Sustainable Finance Scheme

The scheme is also led by SIDBI and aims to provide lons to industries that deal in green energy, renewable energy, technology hardware and non-renewable energy. The government has launched the scheme with an aim to support the entire value chain of clean production/energy efficiency and sustainable development projects.

Psbloansin59minutes.com

This is a digital platform that allows you to get business lons if you want to set up a business. Depending on your eligibility criteria and other requirements, you can avail Mudra Lon Scheme of Rs. 10 lakh loan and under MSME loan scheme up to Rs. You can get a loan up to 5 crores. You can also apply for personal loans up to Rs.20 lakh, home lons up to Rs.10 crore and auto loans up to Rs.1 crore.

HDFC Bank

Key highlights

Loans of up to Rs.40 lakh. Rs.50 lakh in select location.
A processing fee of 0.99% of the loan amount will be charged by the bank.
Repayment tenures of up to 4 years.

TATA Capital

Key highlights

Repayment tenures of up to 3 years
Loans ranging between Rs.50,000 and Rs.75 lakh.
Processing fee of 2.50% of the loan amount plus GST will be charged by the lender

Kotak Mahindra

Key highlights

Loans of up to Rs.75 lakh.
Interest rate charged by the bank will depend on factors such as the loan amount availed by you, the repayment tenure, etc.
2% of the loan amount plus GST will be charged as the processing fee.
Repayment tenures of up to 5 years

Fullerton India

Key highlights

Loans of up to Rs.50 lakh.
Repayment tenures of up to 5 years.
The processing fee charged can go up to 6.5% of the loan amount plus GST.

Startup business loans are of two types –

• Line of Credit
• Equipment Financing.
• Line of Credit

A startup business loan in the form of a line of credit works in a similar manner to a credit card. However, the card is tied to the individual’s business instead of their personal credit. One of the best benefits of a small business line of credit is that customers will have no obligation to pay interest on the borrowed sum for the first nine to 15 months, thereby making it easier to cover expenses whilst getting their business to a good start.

Equipment Financing

In this type of loan for start-ups, the equipment that is bought when starting the business is pledged as collateral, thus enabling the lender to charge a relatively low rate of interest with a slightly higher risk. The customer is expected to repay the amount used to purchase the equipment as revenues are generated from their business.

Similar to a line of credit, applicants are expected to have a high credit score (680+), and the documents required to avail equipment financing include a vendor quote, a detailed credit report, and a statement showing the manner in which the customer intends to utilise the equipment. The main benefit of equipment financing is that the depreciation of the equipment can be used by the customer as a tax benefit for many years.

Things to keep in mind when looking to apply for a Startup Business Loan

Startups looking to get such a loan should ensure the following:

Make a crisp and detailed business plan.

State clearly how you intend to use the loan amount in your business plan.

Summarise the objectives and goals of the business along with a chart that will highlight the potential returns and growth of the venture.

Give a clear approximation of the funds.

Eligibility Criteria for Startup Business Loan

The eligibility criteria to avail startup business loans may vary from lender to lender but the generic ones have been listed below:

Age of the applicant should not be less than 21 years while the maximum age should not exceed 65 years.

The applicant must be a citizen of India.

Applicants should have a business plan.

Are there any government loans for startup business?

Yes, there are government loans that you can get for your startup business. Some of the government loans you can get are:

• Mudra Loan Scheme
• MSME Business Loan in 59 minutes
• Credit Guarantee Scheme (CGS)
• Stand Up India scheme
• Coir Industrial Scheme
• National Bank for Agriculture and Rural Development (NABARD)
• Credit Link Capital Subsidy Scheme
• National Small Industries Corporation Subsidy
• How can I improve my chances of getting a business loan?

Here are some things you should keep in mind while applying for a business loan:

• Make sure you improve your credit score.
• Choose the lender you want to get a business lon from wisely.
• Do not apply for multiple lons. If you have an existing lon, make sure you clear the EMI before applying for a business lon.
• Apply for a loan amount that you know you can repay on time.
• Keep an audited record of your financial statements.
• Make sure you check your credit score on a regular basis.