How to get a loan to buy a business

If you want the best chance of successfully applying for a business loan, you’ll need to understand the application requirements and all the steps involved.

Make sense of the entire process with our comprehensive guide.

Steps to getting a business loan:

1. Engage independent professionals
2. Decide whether to use a broker or deal directly with lenders
3. Put your loan application together
4. Submit your paperwork

 

1. Engage independent professionals

Snapping up the first finance option that comes your way is not the best way to begin your business ownership journey. Getting sound advice from a professional is.

Start by talking to an accountant or financial business advisor before you apply for anything. They’ll help you work out whether loan debt is for you and will be your best resource when applying for finance. Together with your lawyer, they’ll help you perform your due diligence and help you through the rest of the business buying process, so choose wisely.

2. Decide whether to deal directly with lenders or use a broker

Dealing with lenders directly means you do all the legwork: comparing interest rates, talking to sales and customer service, putting your application together. If you have the time and stamina, you can definitely do it all yourself.

Alternatively, you can get a finance broker to organise a loan for you. They’ll act on your behalf and can sometimes secure a better interest rate than if you went direct to the lender. They can also save you time and hassle. If you decide to go with a broker, bear in mind there are different incentives at play.

Most brokers won’t charge you a fee and are instead paid by lenders to help secure your business loan. A few brokers will charge an initial fee and may also be paid by the lender on top of that.

As with anything business related, it pays to do your homework. If you’re going direct, make sure you shop around different lenders and weigh up their offers. If you’re going through a broker, make sure you’re 100% clear on their payment and commission structure and do your research to find a reputable agent. And if you do choose to use a broker, take time to compare at least one or two ‘direct’ options to ensure you’re getting a good deal.

3. Put your loan application together

While each bank will have slightly different application requirements, the overall process is similar across the board.

Your loan application should paint a clear picture of you, your finances and business experience, as well as the history of the business you’d like to buy and why it’s a good investment. It also needs to address any risk factors that would make a lender hesitant to approve your loan, such as lack of security, industry downturn, or poor credit history, and how you plan to overcome these.

Essentially, your application needs to prove to the bank that lending to you is going to be a safe bet for them.

You’ll need:

• Your financial history. A lender is going to want to see what you’re like with money, which means you’ll need to provide your personal credit and financial history. They’ll want to see your estimated personal income once you’ve purchased the business, along with any private bills, living expenses and other loans, debts or credit card repayments you owe.
• A down payment. You’ll still need to put up some of your own money as a deposit, but how much will depend on how much you intend to borrow. As part of your loan application, you need to show how much you’re willing to invest in your new business and where this money will come from.
  Security. Part of the deal with getting a bank loan is that if you can’t pay it back, the bank has the legal right to claim anything you offer as security for your debt. This means you need to put up assets, like your house, or the company’s inventory, as collateral in case you default on your repayments.
• A business plan. You’re more likely to get approved for a loan if you have a strong business case. Your business plan is the best place to show this off. A thorough, well researched business plan will show you’re serious and help the bank understand where their funds will go.
• Personal business experience. When you apply for a loan, just like when you apply for a job, you may need to demonstrate your past experience and how this will help you in your new role. You don’t have to have owned a business, but you may need to show how your job history is relevant and proves you’re capable of running a company.
• Business records. At a minimum, you’ll need to provide the last three years of finances, a comprehensive business history, and any cash flow forecasts or financial information you have.

Want to buy a franchise? The steps above still apply. However, you should also be able to draw on the franchise’s proven model and marketing and business plans for your application. Some brands have preferred lenders, or agreements with specific banks that may make your application process a little simpler, so make sure you discuss all the options with the franchisor before you begin.

4. Submit your paperwork

When you’re confident your application is ready, it’s time to officially handover your paperwork. But, don’t just assume your job is done when you’ve made your initial submission, even if all your documents are in order.

No matter how thorough your application is, it’s likely the lender will come back with more questions and request additional information. So, don’t be surprised if there’s a bit of back and forth involved and more work to do after you’ve submitted your application.

Get started

While getting a loan isn’t necessarily easy, if you do your pre-work and get your documents in order, the process is relatively straightforward.

If you follow the guidelines and advice above, you’ll be well on your way to confidently applying for a loan. Wondering what else you should consider when purchasing a business? Check out our ultimate guide on how to buy a business.