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How to Get a Loan to Buy a Small Business

How to Get a Loan to Buy a Small Business

Small businesses form a large percentage of the Canadian economy.  In fact, small business owners employ 98% percent of all Canadian workers coast to coast. 

However, not all existing businesses will exist forever, and at some point or other, many will be sold to new owners. This represents an opportunity for those thinking about a business acquisition. If you’re interested in buying a small business in order to take it to the next level (and deliver yourself a handsome profit on your investment in the process), then you may need a business acquisition loan to get started.

The challenge is that not every bank or financial institution may be interested in lending you the money. The good news is that there are other options besides traditional bank loans for business financing, including working together with Lendified to turn you into a small business owner in a way that makes sense for you. 

Why You Should Think About Buying a Small Business in Canada

Business acquisition loans can help you buy a company in Canada, which can be a fast and easy method to expand your existing client base, increase your overall capacity for profit, or gain access to new markets. You can even buy a business belonging to a competitor or supplier.

Buying a pre-existing business has other benefits too. Not only will business acquisitions allow you to inherit relatively experienced staff, but the business’s supplier and distribution networks will often be mature as well. 

Small business financing could be the right move for your future, and one of the benefits you can expect to enjoy are the advantages that aren’t always available when making larger deals.

For example:

  • Small businesses have a lower failure rate than large corporations. 
  • Small companies also enjoy faster growth rates than larger firms, at least initially.
  • The startup investment required to buy an existing business is also typically lower than the costs involved in starting your own from scratch, so there’s less risk of losing money on the deal.
  • Purchasing a small business provides an opportunity to become more competitive against larger rivals in your industry.

In addition, If you are interested in turning around a struggling company, buying a small business often presents the best opportunity to do so. But what financial institutions can you trust with your business purchase? Can you even get a traditional business loan, or will you need to work with alternative lenders instead?

The truth is, both can be good options, and the choice will largely depend on your particular circumstances. Sometimes speaking to a financial expert can help you narrow down your choices in order to make the right move. 

What  Criteria Do Lenders Evaluate When You Apply for a Loan to Buy an Existing Business 

Whether you’re applying for a small business loan, or applying for a loan to buy a small business, a lender will always take certain factors into account to decide if you represent an acceptable level of risk. 

Lenders who understand these criteria best (like those at Lendified, for example) can help you get the loans that are right for your situation. Some of the factors that will come into play include the following.

Creditworthiness

As with any personal or business loans, one of the first things your potential lenders will evaluate is your credit score. The better your score, the lower the interest rates you’re likely to get on your loan. 

Business Plan

Another of the major factors lenders will consider is what you plan to do with their money. If they can see that there’s a realistic chance for turning a profit by expanding or growing your business, then you are more likely to get a loan.

Company Turnover

In addition to understanding your business plan, lenders will also want to know how much money the company you’re looking at already makes in sales. This helps give them an idea about whether or not expanding the business in question would be a good investment. Lenders will also look at your personal assets and liabilities just as they would for any other small business loans to determine how risky it might be to lend you money.

Financial Projections

In order for lenders to have confidence that your loan will help the business grow, they need a clear idea of what kind of return on their investment to expect. This makes it important to present accurate and detailed financial projections and financial statements right from the start of the loan application process.

Collateral

When buying an existing business, lenders also need to know you have something of value to put up as collateral in case you are unable to make payments on your loan. This means it’s important, if at all possible, that potential lenders see an asset they can take back from you if necessary.

Supporting Documentation

Finally, lenders will also want to see documentation like previous quarterly and annual reports, your corporate history through at least the past five years, various business licenses, detailed analyses of the market for your product or service that show demand is high enough to support increased activity, tax returns, credit evaluations from third-party organizations, and more.

The Different Available Methods To Finance the Purchase of an Existing Business

Because an established company has a track record of accomplishment, it is often easier to attract capital for this sort of investment than it is for a new business. And you don’t always need to use a lender to get the money you need. 

Personal Financing

Using personal finances to purchase a small business is expensive, but you may be able to get lower interest rates than on loans offered by banks or other financial institutions, resulting in less overall cost for the money.

Existing Business Assets

If you have some assets you can turn into cash quickly, consider selling them to help get the money you need to purchase another business. This might include things like accounts receivable that are owed to you by customers or suppliers, inventory, equipment, etc.

Lines of Credit

Many lenders offer lines of credit that could be used to cover expenses related to the sale and transfer of assets from one business owner to another. This includes things like paying off outstanding loans, fees related to changing business structure, moving costs for employees and goods, adjusting lease agreements if necessary, and more.

Vendor Lines of Credit

If you need money quickly to purchase a small business or cover costs related to the sale of the company’s assets, getting a line of credit from vendors themselves can be another option for expediting the process.

Loan Guarantee

For some small business owners, a loan guarantee can help if your credit score isn’t as high as it needs to be in order to get a traditional loan or line of credit. This can give you access to financing that might not otherwise be available and is worth exploring as an option.

Business Acquisition Loans

Sometimes it’s necessary to refinance or cash out an existing loan in order to have enough money available for your down payment on the new business you want to buy. This can be a viable option if you have already taken out another loan and don’t want to owe more than what it’s worth.

Non Traditional Lenders

Alternative lenders like peer-to-peer lenders, small business lenders, and others are other options worth considering because they can offer great rates on loans to finance the purchase of a business.

Trust Lendified to Get the Information You Need

Lendified is a Canadian-owned lending company that has worked to offer Canadians an alternative way of borrowing money.

They want all Canadians to have the opportunity to be productive economic actors, which is why they work with those who might not otherwise qualify for bank loans, or who need a more flexible solution. We also believe in offering you competitive rates and great terms on our loans.

One of the special advantages we offer is that we work to give you a loan for up to $150,000 within minutes. That means if you need money quickly and easily in order to finance the purchase of a small business, then we may be able to help you get it fast and at a low rate.

Learn more about our programs, small business loans, construction loans and more by visiting our website.

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About the Author

Lendified

Lendified

Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.

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