Getting a loan to buy an existing business requires plenty of prep work. Before you ever speak to a lender, you will need to make sure you are ready. This means more than honing your elevator pitch. You should make sure to have the following documentation in hand or at least available when you meet with a potential lender.
Valuation of the business
Understanding how much the business you are buying is worth is crucial to getting a loan. You will need to know all of the assets and liabilities before you can make this calculation. If you undervalue or overvalue a business, your lender might not be willing to give you the financing you are asking for. Plus, many lenders will do their own valuation so if yours is significantly different from theirs, it could be a problem.
Depending on the existing business you are thinking of purchasing, there could be a whole host of licenses needed. For example, if you are investing in a food service business, you may need a food handlers license. It is important to secure these licenses, when possible before you make a loan application. This is because you may not be allowed to run the business until you have the appropriate licensing. That means you could be held up for weeks or months having to make loan payments but not earning anything from your investment. This could discourage your lender from providing financing.
Having a detailed list of financial projections when you apply for a loan is very important. These projections should offer a picture of future financial outcomes based on current and projected costs, earnings, and decisions. When you are looking at how to get a loan to buy an existing business, financial projections should be near the top of your to-do list. This is because they give your lender an idea of your future profits and show you have a plan for the business.
The final thing you will need when applying for financing to buy a business is a business plan. This is a detailed guide for how you plan to run the company. Providing a business plan helps your lender see the potential of your business and also proves you have a detailed plan for the future.
Having your tax returns ready when you are securing financing to buy a business is so important because they help explain your income. Lenders will be able to see your write-offs as well as where you earn your income. This allows them to understand how much money you will actually have to pay off your debts.
List of debts
Understanding how much money you already owe will be part of the discovery process for any lender. When you are buying a business you should make a list of any current debts to ensure you can afford to take on more loans. If you owe too much or your repayments are high compared to your income, this could make you less desirable to lenders.
Personal credit score
Your personal credits score helps a lender understand the risks of granting you a loan. A better credit score indicates you have made wise financial decisions in the past and are less likely to default in the future. Most lenders will look up your credit score themselves but you should know your score as part of your preparation.
Proof of income
When you are applying for a loan to buy an existing business, the first thing any lender will want to know is, can you afford the repayments? Being able to prove how much you earn goes a long way toward putting a bank or other lending institution at ease.
To learn more about running a company, please check out our business center. We have lots of great articles with help and advice.