To get into entrepreneurship, it is always not necessary to start a new venture from scratch. One can buy or take over an established business as well. However, both proceedings have certain pros and cons. The primary advantages are that an existing business comes with an existing customer base, and the buyers don’t need to invest in brand-building activities, hiring, and training employees. Also, when an aspiring entrepreneur purchases an established profit-making business, he/she doesn’t need to wait for months or years to witness sufficient cash inflow, as the business already has all its operations running. But, before procuring a business, one must understand why it is for sale, evaluate the earnings of the business using various valuation models like asset-based valuation, which involves adding up the market value of its business assets and subtracting its liabilities like existing mortgages, loans, etc., market valuation, which involves determining the valuation of the business based on the selling price of similar companies, and income-based valuation, which involves estimating the current net income of the business and its profitability in the future. Other aspects that need to be looked at are licenses and permits, environmental regulation of the location where the business is located, the status of the business’s inventory, equipment, and other physical assets, and existing contracts. Also, the buyer must get a clear idea about the pending litigation/s involving the business or current business owners, if any.

An established business comes at quite a high price. Hence, those who don’t have deep pockets often look for loans to arrange money for making the purchase. Though it is easier to get a loan for buying an existing profitable business than for investing in a start-up, before applying for a business acquisition loan, one must check his/her current credit score to get an idea about his/her eligibility for different types of loans. Higher credit scores often help to secure loans with lower interest rates. Also, a borrower must compare multiple loan options to understand which one he/she can qualify for, with the current credit score, income statements, personal debts, etc. Apart from the financial data, the buyer usually needs to submit a business strategy, that mentions how he/she is planning to run and grow the newly acquired business, a Letter of Intent(LOI), which mentions that he/she is formally considering buying the business, cash flow projections over the next 3-5 years and an independent assessment of the worth of the business he/she is planning to buy.

Business Loan options for buying an existing business:

Traditional business term loans

Issued by banks and credit unions, these loans come with pre-set repayment terms and lower interest rates. However, traditional lenders have more stringent qualification requirements than online lenders. In the case of business acquisition loans, banks give approvals only when the business, that is getting procured, has substantial assets and the applicant has a high credit score, substantial annual income, and collateral. However, conventional business term loans are often considered ideal for large-scale acquisitions.

Online business term loans

Online lenders are comparatively lenient in terms of credit scores and other qualification requirements. Apart from term loans, they offer a wide variety of business finance that can be used to purchase an existing business. Due to the less-stringent requirements of these lenders, online business term loans often turn out to be the best business acquisition finance for loan seekers with low credit scores. Also, online lenders give approvals within a few hours of the application. Hence, those looking for quick funds to avail of lucrative offers find online business term loans extremely helpful. However, these loans come with higher interest rates.

SBA Loans

The most popular program of SBA(Small Business Administration) loans, SBA 7(a) , helps buyers to purchase existing businesses. These loans are offered by multiple SBA-approved lenders, who require the applicants to have a personal credit score of at least 670. Those who have credit scores more than the above-mentioned figure, get more favorable repayment terms. Also, the lenders often evaluate the history of the business the applicant is looking to purchase.

Seller Financing

For buying an existing business, one of the most common financing options is seller financing. This is ideal for those who don’t qualify for conventional, online, and SBA loans. In this case, loan seekers need to reach out to the sellers and get into an agreement, which mentions that the borrower will be provided with a certain amount of money that needs to be repaid over a pre-decided time with a specific interest rate. The terms of seller financing are decided by the participating parties. Sellers offer loans when they are looking to sell their businesses as fast as possible and are not concerned about receiving the entire payment immediately.