Where to Get a Loan to Buy a Business - Small Business Trends

Where to Get a Loan to Buy a Business - Small Business Trends


Where to Get a Loan to Buy a Business - Small Business Trends

Posted: 07 Apr 2021 06:00 AM PDT

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When seeking to buy an existing business, you may need to get a loan to cover all or part of the initial purchase. There are plenty of small business financing options to choose from, including SBA loans, bank loans, seller financing, and online options like Fundera and Lendio.

To learn more about buying an existing business, download your free copy of BizBuySell Guide to Buying a Small Business. You can also download the free ebook BizBuySell Guide to Selling Your Small Business for small business owners seeking a buyer for an existing business.

Use the BizBuySell Business for Sale feature to find a small business for sale or the Find a Business Broker  feature to get help finding a small business.



How to Get a Business Acquisition Loan

One way to buy an existing business is through a business acquisition loan. Below we outline some types of business acquisition loans available and some things you'll need before you even get started looking for a loan to buy a business.

Requirements for the Loan Application Process

To begin with, here's a list of application requirements and information that will be examined during the loan application process.

Financial Records

In order to get a loan to buy a business, you'll need to prove the business's financial stability. Financial records go a long way. This generally includes things like bank statements, current debt, and income. They demonstrate your ability to repay a lender.

Business Valuation

Lenders want to know that their investment in your loan is safe. So they generally won't give you more money than a business is worth. As such, you'll need to provide proof of the business's value. This can be calculated using multiple factors, including revenue, assets, cash flow, and market analysis.

Business Plan

A business plan is what demonstrates your ability to continue running the business profitably. This type of plan generally includes your market, product or service, competitive analysis, and strategies for growth and marketing. You also generally need to submit a business plan when getting a loan to start a business. So it's a similar requirement for business acquisition.

Earning Projections

What is the business expected to bring in moving forward? This obviously has a major impact on your ability to repay a lender. It's common to use current revenue to create these projections. But there may also be other factors that you could use to demonstrate the likelihood of future growth. For example, if your new business is in an emerging industry, use industry market projections to back up higher earning projections. Some due diligence can go a long way toward demonstrating your potential future earnings.

Track Record and Experience of the Borrower

It's not just the business's finances that your lender will want to analyze. They also want to know your own personal financial situation and experience. For example, if you're debt free and have successfully run businesses in the past, that bodes well for your ability to repay a business acquisition loan. However, excessive debt or a recent bankruptcy filing may serve as a red flag that makes it harder to secure financing.

Personal Finances

When it comes to your personal finances, potential lenders will review multiple factors to get the entire picture. Basically, they want to analyze your personal financial stability to gauge your ability to repay the loan. Here are some of the most important factors they'll look at when an entrepreneur applies for a business acquisition loan.

  • Credit score: Your credit score takes a variety of factors into account, like your ability to pay bills and the amount of outstanding and open credit you currently have.
  • Tax returns: Your tax returns outline your income and expenses from the past several years. This shows lenders where your current income stands and where it comes from.
  • Outstanding debts: The more debt you have, the more difficult it may be to repay a business acquisition loan. This doesn't mean you have to be completely debt free. But a lender is going to want to see a full list.
  • Cash flow: Your ability to bring in money plays a big role in your ability to get a business loan. They'll want to know your personal income cash flow and that of the business you're seeking a loan to buy.
  • Collateral: Sometimes, a little extra assurance is needed for a lender to feel comfortable granting a business acquisition loan. Your personal assets like your home or investment accounts may serve as collateral.

Loan Type to Buy an Existing Business

There are a variety of loan types when seeking financing to buy an existing business. Here is a brief overview of each.

Conventional Business Loan

A conventional business loan generally comes from a bank or other financial institution. They often provide a large lump sum of cash that you pay off over several years. Terms vary, but these loans can come with competitive rates.

However, they are often difficult for very small businesses and new entrepreneurs to obtain. Banks consider business loans for this type of borrower to be fairly risky. So they generally check multiple factors like your credit score, business history, business plan, and assets. And their standards are likely to be a bit higher than those of online or alternative lenders. They may also require you to put up significant collateral to lessen their risk.

Additionally, conventional loans often provide a large amount of funding — sometimes up to $500,000. This can be a positive for those looking for large business acquisition loans. But it's often not ideal for small businesses looking for more manageable payments.

Seller Financing from the Business Owner

With seller financing, the current business owner essentially acts as the bank providing financing for the buyer. They offer a loan that covers all or part of the purchase of the business. And the buyer repays that loan in pre-agreed-upon payments over time, with interest. The interest rate is often comparable to that of an SBA loan. And sellers generally still check credit scores and financial records before offering loans.

For the buyer, this provides an option for acquiring a new business without having to provide all the cash upfront. And it's ideal for those that may not qualify for traditional bank loans. For the seller, this allows them to get a slightly better price for their business, since they'll also be able to collect interest over time.

However, the arrangement does come with risks for both sides. Terms vary, but sellers are generally able to re-take ownership of the business if payments are missed for a significant period of time. However, many sellers only offer business acquisition loans if they're fairly confident in their company's ability to make money.

Rollover of ROBS Loan

ROBS stands for rollovers as a business startup. This type of loan involves using funds from a 401(k) or IRA retirement account to invest in a new business. But it can be used as a way to fund acquisition of am existing business too. It's a complex option that requires an attorney or financial expert with experience in ROBS plans. Basically, you form a new corporation and set up a 401(k) for it. Then you can roll the money from your existing accounts into it and use it to fund the business.

This is an attractive option for some because it doesn't involve interest. In fact, you don't take on any official debt at all. It also does not involve the typical credit checks that come with applying for a business acquisition loan.

However, the risk for a ROBS loan is potentially losing your retirement savings. If the business you're purchasing doesn't work out, you've also lost your nest egg for the future. Additionally, this money being used to fund your operations means that it's not growing in the market. This may be worthwhile if the venture works out. But if not, you're missing out on years of potential gains.

How to Get an SBA Loan to Buy a Business

Another of the financing options open to entrepreneurs seeking to make a business purchase is the so-called SBA 7(a) loan. Here are some details about this option.

What is a Small Business Administration Backed Loan?

An SBA loan is similar to a conventional business loan in that it is offered by a bank or credit union. However, the funds are backed by the U.S. Small Business Administration and are specifically set aside as small business loans. So the financial institution doesn't have to take on as much risk. This allows banks to provide more opportunities for new entrepreneurs and small loans.

How to Qualify for an SBA 7(a) Loan

SBA loans are set aside for small businesses. And there are different types of SBA loans with clearly defined standards that vary by industry. But generally, you need to have fewer than 1,500 employees and less than $40 million in receipts each year. You also must be located or do business in the United States and operate for profit.

A borrower must also demonstrate the need for a business loan. This means you must have already invested personal assets before seeking a loan. And you must use the funds for a sound business purpose like operating expenses or growth.

Though your personal financial situation may not be quite as scrutinized with an SBA loan, you cannot qualify if you have outstanding debts to the federal government. And lenders can still consider your financial history when approving your application and deciding your interest rate.

Documentation Needed for an SBA Loan

Your bank or credit union will use a variety of factors to determine your loan eligibility and interest rate. Before applying for an SBA loan, gather the following documentation:

  • Loan application: The SBA provides this application form to collect basic information from the borrower.
  • Personal background and financial statement: These are also forms provided by the SBA. Complete the personal background statement and personal financial statement to provide information about your business and financial history.
  • Business financial statements: When seeking a business acquisition loan, include the profit and loss statements and projected financial statements from the business you plan to purchase.
  • Ownership and affiliations: Include a list of all proposed owners and affiliations you currently hold.
  • Proposed bill of sale: Include the terms of the sale so the lender can confirm the intent to purchase and the amount needed.
  • Loan history: Include any loans you've already applied for. This may include loans for the business and/or past ventures.
  • Tax returns: Include your personal tax returns so the bank can confirm your income. And include at least two years of tax returns from the business to give them an idea of the income potential.
  • Resumes from principals: Your professional history can impact the success of the business. So include your resume and resumes from any other principals who will be involved.
  • Business overview: Include an explanation of the business and why the loan is needed.
  • Lease: If there's a physical location for the business, include the lease terms. If the business doesn't yet have a lease agreement, include a proposed agreement signed by the landlord.
  • Asking price: An application for a business acquisition loan should also include the proposed total sales price. Add a rundown of other costs like inventory, equipment, furniture, and fixtures.

Steps to Get a Loan Backed by the SBA

The process of applying for a business acquisition loan can vary from case to case. But there are some basic steps that apply to most entrepreneurs looking for SBA loans:

  • Find an eligible lender: SBA loans are granted through third party lenders. Start by finding a bank or financial institution in your area that qualifies as an SBA lender.
  • Gather your documentation: Go through the list of applications and documents above and gather them to submit to your lender.
  • Wait for approval: Your lender will review your application and documents and submit them to the SBA. The SBA decides if they will guarantee the loan. And they work with the lender to agree upon terms.
  • Close on the loan: If you are granted approval, you'll need to agree on the terms. And you'll have to complete any required extra steps like guaranteeing collateral.

Buying a Business with No Money Down

Finally you can buy a business with no money down. Here are the most popular methods.

Get Financing from Small Business Owner

As mentioned earlier, instead of getting an official business acquisition loan, you may secure financing from the current small business owner. Seller financing is often used to fund just part of a small business. But depending on your situation, they may provide the full amount that you can pay off over time.

This option does generally come with some interest. And you'll risk losing the business if you can't make payments on their terms. But small business owners often only offer to finance if they're fairly confident in the business's ability to earn.

Get Money from Friends and Family

You don't necessarily need your own capital to pay for a business completely upfront. If you have friends and family who are willing to help, this can be an easy and low risk way to invest in a new business opportunity.

The risk with this type of business purchase is mostly personal. You may risk relationships or provide too much power to friends and family without business experience. This is why clearly outlining the terms before borrowing from friends and family is so important.

Get Funds from Leveraged Buyout

A leveraged buyout involves using borrowed money and using the assets of the company being purchased to cover the initial cost. For example, you might secure a business acquisition loan to cover part of the purchase. And then you can leverage the business's equipment or real estate assets as collateral to secure a larger sum.

This allows you to complete a business acquisition with little to no money down. But it also means you won't have much equity in the business early on.

How much can you borrow for buying an existing business?

The amount of money included in a loan to buy a business varies depending on what type of financing you seek. With a traditional business loan, you may be able to get up to $500,000. With smaller or alternative financing, you can borrow smaller amounts as little as $5,000.

The amount you're able to get also varies depending on factors like your business and credit history. When securing a loan to buy a business, the company's profitability and financial history will also play a role. The lender will want to know that you'll easily be able to pay back the loan with your earnings.

What kinds of businesses can you buy with SBA loans?

The SBA can help you secure a loan to buy a business in a wide array of industries and niches. The main qualifications are that the business must be for-profit and have an established history of at least two to five years. It should also qualify as a small business under the SBA's guidelines.

Other factors like your access to capital and credit history may impact your personal eligibility. And the business's income and need for a loan may also factor in. But the actual industry or type of business should not affect your ability to get a loan, outside of its impact on potential profitability.

How do you start a business with no money?

There are several options to start a new venture without startup capital. You might seek small business financing from SBA loan programs or seek an alternative financing option like Fundera or Lendio. Some small business owners also seek a startup loan from family or friends, either to cover the whole sale price or the money needed to secure a loan. Using bootstrapping techniques to start your business may be another option.

No matter what method of financing you choose, it may be beneficial to start a business that doesn't require much startup capital. For example, an online business without a physical location is going to require less upfront investment. So even if you do need a loan to cover equipment or supplies, it should be easier to obtain the full amount.

Image: Depositphotos


SBA raises COVID-19 EIDL loan limit to $500000 - Journal of Accountancy

Posted: 24 Mar 2021 12:00 AM PDT

The U.S. Small Business Administration is more than tripling the maximum amount that small businesses and nonprofits can borrow under the COVID-19 Economic Injury Disaster Loans (EIDL) program.

Starting the week of April 6, the loan limit for COVID-19 EIDL loans will jump from six months of economic injury with a maximum loan amount of $150,000 to up to 24 months of economic injury with a maximum loan amount of $500,000.

"More than 3.7 million businesses employing more than 20 million people have found financial relief through SBA's Economic Injury Disaster Loans, which provide low-interest emergency working capital to help save their businesses," said SBA Administrator Isabella Casillas Guzman in a news release. "However, the pandemic has lasted longer than expected, and they need larger loans."

Any COVID-19 EIDL loans in process when the new loan limits go into effect will automatically be considered for the new maximum limits, the SBA said. Existing COVID-19 EIDL borrowers will be able to request an increase beginning April 6. A spokesperson said the SBA will provide updated instructions on how to request a loan increase on SBA.gov and also will reach out directly via email to existing COVID-19 borrowers with loans approved prior to the increased loan limit taking effect.

The SBA has approved more than $200 billion in COVID-19 EIDL loans. The loans have a 30-year maturity with interest rates of 3.75% for small businesses, including sole proprietors and independent contractors, and 2.75% for not-for-profits.

The announcement of the higher loan limits came less than two weeks after the SBA announced March 12 that it was extending deferment periods for all its disaster loans, including the COVID-19 EIDL loans. Thanks to that decision, COVID-19 EIDL recipients won't have to start making payments on their loans until 2022, though borrowers may voluntarily continue to make payments during the deferment as interest will continue to accrue on the outstanding loan balance.

AICPA experts discuss the latest on the PPP and other small business aid programs during a virtual town hall held every other week. The webcasts, which provide CPE credit, are free to AICPA members and $39 for nonmembers. Go to the AICPA Town Hall Series webpage for more information and to register. Recordings of Town Halls are available to view for free on AICPA TV.

The AICPA's Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.

Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.

For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA's coronavirus resources page or subscribe to our email alerts for breaking PPP news.

Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.

SMBX – Small Business Bonds Marketplace Review - MarketBeat

Posted: 07 Apr 2021 10:14 AM PDT

SMBX – Small Business Bonds Marketplace Review

One of the many questions raised during the Covid-19 pandemic is how all of us can support the small businesses in our communities. These businesses are the engine of job growth and they have been the most affected by local, state, and federal mitigation efforts.

That's not exactly why the SMBX was created, but it's a timely use case that showcases the power that community can have in helping support small businesses. SMBX is a platform where crowdfunding meets fintech. It's an interesting concept that has the potential to be a game-changer for the way small businesses approach raising capital.

An Equitable Alternative to an SBA Loan

SMBX is an online marketplace that allows individual investors (that is everyday people like you) to buy small business financial securities. It can be difficult for some small businesses to get a business loan. With SMBX, a small business owner is taking a different route. In this case, they are raising capital from the public. Like a bank loan, the investors provide the local business with the capital they need. The business then pays the investors back with interest. In essence, the investors become the bank.

Investors provide capital to the business of their choice by purchasing small business bonds in increments of $10 at a time. The small business bond is a fixed debt instrument issued at $10 par value that yields principal plus interest on a monthly basis.

In some cases, the bonds are backed by the assets of the business. Other bonds are unsecured. Like any sort of debt, an unsecured bond will have more inherent risk.

Although bond investing is generally seen as carrying less risk than investing in stocks, they are not without risk. Investors need to do their own due diligence and should not invest more than they can comfortably lose.

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A Win-Win For Small Businesses and Their Customers

Why would a business do this? The simple answer is because it can. The traditional SBA loan is time-consuming and burdensome for businesses. And with regulatory fees that get added in, businesses can find it difficult to manage their cash flow effectively.

SMBX is an avenue for raising capital that was previously unavailable. For a business the process is faster than getting a bank loan, it brings with it fewer regulations, and the business has smaller fees. A small business owner can also benefit from the free publicity that comes when they raise capital from their local customers.

And small business bonds are debt instruments so the business retains 100% of its ownership.

Why would individual investors do this? This is perhaps the clearest example of voting with your dollars. Simply put, the SMBX allows consumers (who are also investors) to support the companies that they believe in. They can also now engage with the company in a whole new way because they are now, in effect, a business partner.

But idealism only gets you so far. Investors will also earn interest on their investments that average around 6.5%. For risk-averse investors, that's a pretty sound investment strategy, particularly since investors are not charged any fees.

The SMBX is Regulated Under Title III

The concept of participative finance is not new. In 2012, the United States Congress passed Title III of the JOBS Act. This authorized small and medium-sized businesses, investors, and funding portals to participate in Title III securities offerings. As one such funding portal, the SMBX is governed by the rules and regulations established by the Securities & Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA).

SMBX Does Some of Your Due Diligence For You

Because these are not publicly traded companies, prospective investors do not have as much access to financial information as they would in traditional equities. However SMBX does analyze a company's information for such things as debt service coverage (does the company have enough income to pay its debts), its debt-to-equity ratio, and working capital ratio. All of these factor into the range of yields that SMBX will set for a business.

They will also look at qualitative factors such as financial trends, who are the company's competitors, the management tenure, and even customer and vendor reviews.

How to Get Started With SMBX

Any investor familiar with trading apps such as Robinhood or Webull will find SMBX to be easy to navigate. However, here's a brief tutorial for the beginner.

The first step for investors is to create an account on the SMBX website . New investors can also create an account by downloading the SMBX mobile app.

Now you're ready to invest. First, you can scan the site to find a business of interest. Here's where you can get an idea of the company's goals and vision. You can also learn more about how they plan to reach those goals. Remember, these are not publicly traded companies so there will not be as much detailed financial information as you would get from a company that is required to submit forms to the SEC.

When you find a small business of interest, you can reserve bonds at the lowest yield. Or you can place a bid for a higher yield (this is similar to eBay).  When you make a bid, you will provide funds that will be placed in escrow until the auction closes.

In some cases, there will not be enough bonds for every investor. That means you can be outbid.

After the auction closes, the bonds are filled at the rate of the last successful bid. If you were a successful bidder, the money that was in escrow will now be deployed to pay for your bonds. You will begin to receive principal and interest each month until the bond matures. Funds are paid to your SMBX account (SMBX Book).

If your bid was unsuccessful, your money will be credited back to your SMBX Book for you to either withdraw or use to place another bid.

Demystifying an SMBX Auction

Company XYZ is seeking $2,000 through bond issuances. It is proposing to auction 200 $10 bonds within a range of 6% - 8%. (Note: Businesses can raise between $100,000 and $1,000,000 dollars).

As noted above, investors can either buy bonds immediately at the lowest yield offered by the company (in this case, 6%). Or they can bid within a pre-set range of yield (in this case as low as 6% but no higher than 8%).

So for example:

  • Investor A bids for 80 bonds at 6.0%.
  • Investor B bids for 80 bonds at 6.5%
  • Investor C bids for 80 bonds at 7.0%
  • Investor D bids for 80 bonds at 7.5%

In this example, Investors A, B, and C will be awarded bonds at the offering yield which is the highest successful bid of 7%. Investors A and B will receive 80 bonds each and Investor C will receive 40 bonds. All will get the monthly payments at the uniform yield of 7%.

Over 96% of Capital Raised Goes to the Business

When we invest in a charitable cause we like to know how much of our donation will actually be going to the charity? In a similar vein, it's good to know how much of their investment capital will be going to support the business an investor selects? In the case of SMBX, 96.5% of the raised capital goes to the business. SMBX will charge a 3.5% service fee for the total capital raised. Additionally, there is a $100 annual maintenance fee that is charged to the business until the bond matures.

And that same transparency is also a benefit to businesses because there are no hidden fees that depend on interest rates. 

The Bottom Line on the SMBX

Real innovation often takes place under the radar. The SMBX is a straightforward way for small and medium-sized businesses to quickly raise capital. The service is still in its infancy. As more businesses become aware of the platform it is likely to expand. As an investor, you can spread the word to your favorite small businesses to see if they can tap into this convenient source for raising capital.


7 Penny Stocks That Don't Care About Robinhood

By the time you read this Vladimir Tenev, the CEO of the trading app Robinhood, will be testifying in front of Congress. The company's role in the GameStop (NYSE:GME) short squeeze will be called into question.

However, the real issue at stake is the right of traders to buy and sell the equities of their choice. In the case of Robinhood, some traders are buying a lot of penny stocks. While definitions vary, penny stocks are generally considered stocks that are trading for less than $10 per share. These stocks are largely ignored by the investment community.

One reason is that many of these stocks are cheap for a reason. For example, the company may have a business model that is out of date. In other cases, they operate in a very small, niche market that doesn't drive a lot of revenue.

And most of these stocks are ignored by the investment community. They simply aren't considered significant enough to spend time debating.

But some penny stocks do have the attention of Wall Street. And they're being largely ignored by the day trading community. The focus of this special presentation is to direct you to penny stocks that have a story that the "smart money" thinks will eventually be trading at much higher prices.

And that's why you should be looking at them now.

View the "7 Penny Stocks That Don't Care About Robinhood".

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