Buy a Business

How to Get a Loan to Buy a Business: Everything You Need to Know

Buying a business is an exciting but complex endeavor. Whether you’re looking to own a franchise or acquire an existing business from a retiring owner, securing the right financing is often the first and most critical step. For many entrepreneurs and small business owners, Small Business Administration (SBA) loans offer a lifeline, combining affordability with accessible terms.  Our goal is to provide a comprehensive guide on SBA loans for buying a business, helping you understand their advantages, applications, and key considerations. It will help you to understand how to how to pursue an SBA loan to buy a franchise or an existing business.

What Are SBA Loans?

SBA loans aren’t funded directly by the government. Instead, the U.S. Small Business Administration (SBA) backs or guarantees, a portion of the loan, reducing the risk for lenders. This makes it easier for small business owners to qualify for financing. SBA loans usually have lower equity injections and interest rates, longer repayment terms, and higher borrowing limits than traditional bank loans. SBA loans can be used for various business needs, like covering expenses or purchasing equipment, but they are especially useful for those buying a business, provided the business meets the SBA’s requirements.

Key Benefits of SBA Loans in Buying a Business

• Lower Interest Rates: More affordable compared to conventional loans and credit cards
• Flexible Terms: Extended repayment periods, typically up to 10 years for business acquisition and up to 25 years for real estate purchases.
• Smaller Down Payments: You may need less upfront capital
• Reduced Risk for Lenders: SBA backing enables lenders to approve loans for individuals with relatively lower credit scores or shorter track records.

Types of SBA Loans to Buy a Business

Two primary SBA loan programs cater effectively to loans to buy a business. 

1. SBA 7(a) Loan to Buy an Existing Business – The SBA 7(a) loan is the go-to option for entrepreneurs looking to buy an existing business or franchise. It offers flexibility, competitive terms, and loan amounts up to $5 million, making business ownership more accessible.

• Eligibility: The business must be for-profit and located in the United States and the buyer must also plan to actively manage the business after the purchase.
• Usage: Loan funds can cover a range of needs, from purchasing equipment and securing working capital to acquiring an established business.
• Terms: We can make available up to $5 million to buy the business. Repayment terms up to 10 years for business purchases or 25 years for real estate-related loans. Typically this type of loan requires a down payment of 10%.

2. SBA 504 Loan for Buying an Existing Business – On the other hand, the SBA 504 loan is specifically designed for purchasing commercial real estate or large equipment purchases. It’s ideal for entrepreneurs to acquire businesses that require significant physical assets but cannot be used for working capital or other expenses.

• Eligibility: The acquired business must align with the SBA’s job creation or community development goals.
• Usage: May ONLY be used to purchase physical assets such as real estate, land, or heavy equipment.
• Terms: Loan amounts up to $15 million, with 50% from a lender, 40% (up to $5.5 million) from a Certified Development Company (CDC), and at least 10% from the borrower. Repayment terms are up to 25 years for real estate and 10 years for equipment.

Both programs allow buyers to use an SBA loan to purchase an existing business, whether it’s an independent company or part of a franchise.

When Should You Use an SBA Loan?

An SBA loan is a great option for entrepreneurs, especially when you’re looking to buy a franchise. Franchises offer built-in brand recognition, proven business models, and ongoing support from franchisors. However, start-up costs can be high, especially for established well-known franchises. An SBA 7(a) loan to buy a franchise is often a great fit, offering flexible terms to cover franchising fees, equipment costs, and working capital. Plus franchises are pre-approved by the SBA, making the loan approval process easier. 

Buy an Existing Business from a Retiring Owner

Purchasing an established business may be a less risky path than starting from scratch. Existing businesses already have an established customer base, proven revenue, and operations in place. But acquiring a business often requires significant capital, especially if the seller requires a large upfront payment. An SBA loan can make it easier by providing the necessary funds while allowing buyers to spread the upfront costs over several years, making ownership more affordable.

The SBA 7(a) loan remains a popular choice for business acquisitions, offering up to $5 million in funding, flexible terms, and strong support for buyers. In some cases, retiring owners may also agree to partial seller financing, which can help supplement your loan funds.

How to Qualify for an SBA Loan to Buy a Business

While SBA loans are known for their accessibility, they do come with specific eligibility requirements. Here’s what you’ll typically need to qualify for an SBA loan to acquire a business.

1. Credit Score – Lenders generally look for credit scores of 650 or higher. A higher score improves your chances of securing approval and qualifying for better terms.

2. Strong Business Plan – Lenders want assurance that the acquired business will generate enough cash flow to cover the loan and operating costs. When crafting a business plan, include:

• Detailed financial projections
• A clear strategy for managing and growing the business
• Information about your prior industry and business experience

3. Down Payment and Equity Contribution – Most SBA loans require buyers to contribute 10-20% of the business acquisition cost. This personal investment demonstrates your commitment to the venture. Be prepared to show you have the required funds available.

4. Business Viability – Lenders will assess the financial strength of the business you’re acquiring. Be ready to provide historical financial records, including:

• Tax returns
• Profit and loss statements
• Future revenue projections

5. Collateral – Lenders may require personal or business assets as collateral. While SBA loans come with a government guarantee, additional collateral is often needed to protect against default.

6. Personal Guarantee – This guarantee holds you personally accountable for repaying the loan and is typically required, especially for smaller loans or first-time borrowers. 

The SBA Loan Application Process for Buying a Business

Applying for an SBA loan to buy a business involves several steps. Here’s what the process typically looks like:

Step 1. Choose the Right Loan Program – Decide whether the SBA 7(a) or SBA 504 program is best suited for your business acquisition. For franchises, the 7(a) loan is usually the ideal choice.

Step 2. Find an Approved Lender like First Bank of the Lake – First Bank of the Lake has made over 1000 loans totaling $1.1 billion. First Bank of the Lake is ranked as the 15^th largest SBA lender in the nation and has helped many entrepreneurs successfully buy a business or franchise.

Step 3. Complete Your Application – An SBA application typically includes the following documents:

• Loan application form (Form 1919 for 7(a) loans).
• Business plan and profit projections.
• Personal and business financial statements.
• A purchase agreement and valuation report for the existing business.
• Proof of down payment. 

Step 4. Undergo Loan Review and Approval – Your lender will review your application, financials, and supporting documents to assess the loan request. This step can take several weeks, as SBA loans typically undergo more rigorous evaluations compared to traditional business loans. 

Step 5. Close the Loan – Once approved, your loan proceeds will be disbursed, allowing you to complete your business acquisition. Terms and repayment plans will be finalized during this stage. 

An SBA Loan Can Make the Difference in Your Business

Obtaining financing for a business acquisition can feel overwhelming, but SBA loans make the process much more manageable. They offer favorable terms and accessibility that are often hard to find with conventional lenders, making them a lifeline for entrepreneurs aiming to buy a franchise or take over an existing business. Additionally, their flexibility and lower interest rates make them cost-effective solutions in the long run. 

If you’re an entrepreneur eyeing your next big opportunity, knowing how to access the right financing can make all the difference. With SBA loans at your disposal, buying a business has never been more achievable. Whether you’re exploring a franchise or taking the reins from a retiring owner, these loans provide a secure and strategic way to turn your entrepreneurial vision into reality. If you’re ready to take the plunge, start your application process today by consulting with an SBA-approved lender or financial advisor. The business of your dreams is just a loan away!

About First Bank of the Lake

The friendly financial experts at First Bank of the Lake offer SBA loans designed with the needs of our customers in mind. We financed more than $500 million in SBA loans over the past 12 months and are ranked as the 14th largest SBA lender in the United States. Since our founding in October 1985, we have offered outstanding customer service and the best financial options for their needs. Today, First Bank of the Lake offers loans for business enterprises across the United States. To learn more about our bank or to apply for an SBA loan, visit our website or check us out on Facebook or LinkedIn. Our friendly and knowledgeable staff members will be happy to discuss your loan options with you and to help you achieve the highest degree of success in your chosen industry. Please contact us at (888) 828-5689 to get your business loan questions answered today!