How To Get a Loan To Buy a Business + Key Considerations

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Buying an existing business gives you immediate access to an established customer base, existing cash flow, and proven operations. The challenge is that a good business often comes with a big price tag. If you can’t fund the purchase yourself, business acquisition loans can provide the money you need.

Here are some of the key financing options available, the pros and cons of borrowing for an acquisition, and how to get a loan to buy a business.

What is a business acquisition loan?

A business acquisition loan is a specific type of small business loan to finance the purchase of an existing business, buy out a partner, acquire franchise rights, or purchase another company’s assets. Unlike startup funding, these loans are backed by the target business’s proven cash flow, revenue history, and tangible assets.

Business acquisition loans are often offered by the same types of lenders that offer loans for other business purposes. Think banks, credit unions, or online lenders. 

But when evaluating applications for business acquisition loans, lenders consider more than the borrower’s credentials. They also look at the financial health of the target business—specifically its existing cash flow—to ensure it supports the loan payments. Lenders also review the acquisition target’s total annual revenues, tangible assets, and financial history.

Types of business acquisition loans

1. SBA 7(a) loans
2. Traditional bank loans
3. Seller financing
4. Online lenders
5. Supplemental financing

There are several common financing options available for buying an existing business. When evaluating each, consider the interest rate, payback term, down payment, and required collateral. Here’s what to know about the four most common types of business acquisition loans:

1. SBA 7(a) loans

SBA 7(a) loans are the gold standard for buying an existing business. The US Small Business Administration (SBA) does not issue these loans directly. Rather, the SBA guarantees a large portion of loans made by a partner bank. This guarantee reduces the lender’s risk, resulting in competitive interest rates, lower down payments, and longer, more flexible terms—generally up to 10 years for a business acquisition.

SBA 7(a) loans are only available to US-based businesses, but many countries offer similar programs. For example, Canada’s Small Business Financing Program (CSBFP) shares risk with lenders and provides loans up to CAD $1.15 million for businesses with gross annual revenue of less than $10 million.

2. Traditional bank loans

Entrepreneurs can also get a business loan from a traditional bank to purchase a company. The bank lends you a lump sum of money, known as a term loan, which you then pay back, plus interest, during a set period of time.

Getting a conventional bank loan for a business acquisition is more difficult than getting an SBA-backed loan. Banks have very strict eligibility requirements, lending only to the most creditworthy borrowers. You need an impeccable business credit profile, a strong personal credit score, and a down payment of as much as 30%, and you may be required to put up additional collateral—assets the lender can seize if you default on the loan. 

This option often makes sense for a highly profitable, established business acquiring a smaller competitor, where the company has a long-standing relationship with its bank.

3. Seller financing

Seller financing is an arrangement where the current owner of the acquisition target acts as the lender. Instead of borrowing from a bank, you receive a loan directly from the seller for part of the purchase price, which you repay with interest.

This is common in acquisitions, especially when a business lacks the tangible assets—like real estate—that traditional banks typically require as collateral.

Seller financing is often used to bridge a gap. For instance, an entrepreneur might use an SBA loan for 75% of the purchase, put 10% down in cash, and have the current owner finance the remaining 15% to close the deal.

4. Online lenders

For smaller acquisitions or entrepreneurs who want to move quickly, online lenders typically have a more streamlined application process and faster funding than traditional banks.

This convenience also comes at a cost. The interest rate is usually higher, and loan terms are shorter, leading to bigger monthly payments. Only consider this option if you’ve done your due diligence and are confident the business’s existing cash flow can support the more aggressive repayment terms.

5. Supplemental financing

If you can’t finance the entire acquisition with one loan, there are additional options available to help fill the gap:

• Unsecured business lines of credit. Although not used for the main purchase, an unsecured business line of credit offers a revolving line of credit you can draw on to cover operating expenses or working capital during the transition, without the need to put up additional collateral.

• Equipment financing. Equipment financing is a loan that lets you acquire machinery, vehicles, or other equipment by spreading the cost over time, rather than paying the full amount upfront. If you’re buying a business where the value is tied up in physical assets, you can use equipment financing as part of the deal.

Pros and cons of getting a loan to buy a business

Taking on debt to buy a business is a major decision—don’t take it lightly. Here are some of the benefits and risks:

Pros of business acquisition loans

• Immediate cash flow. You acquire a business with proven existing cash flow and annual revenues, which can cover the new loan payments immediately.

• Faster growth. It’s a shortcut to gaining an established customer base and market share, bypassing the risky startup funding phase.

• Lower risk. You’re investing in a proven concept with financial statements and a track record, which lenders prefer over a new idea.

• Retain ownership. Unlike venture capital, where investors usually want a stake in the business, debt financing lets you retain full ownership.

Cons of business acquisition loans

• Financial risk and debt. You’re taking on significant debt, and if the business operates poorly after the purchase, you’re still responsible for repaying the loan.

• Strict requirements. Credit approval is not easy, and lenders have strict eligibility requirements. They will scrutinize your personal credit score, business plan, and down payment—the amount and the source of funds.

• Closing complexity. Involving a lender adds layers to the deal. You’re not just negotiating with the seller—you also need to meet the bank’s strict underwriting requirements, including independent business valuations, specific legal structures, and detailed financial documentation.

• Repayment risk from hidden issues. You may discover hidden problems with the business, like customer churn or faulty tech, only after the former owner has exited. If these issues cause cash flow to drop, you might struggle to cover the fixed monthly loan payments, putting you at risk of default.

How to get a loan to buy a business

1. Organize and assess your financial position
2. Identify and analyze your target business
3. Prepare a business plan
4. Shop for the right loan
5. Complete the application and underwriting

Securing financing for a business acquisition is a detailed process. Here’s a breakdown of the steps:

1. Organize and assess your financial position

Before buying a business, evaluate your finances. Check your personal credit score; a score of 700 or higher (out of a maximum of 850) helps you to qualify for the best loan options. Gather key documents, including at least two years of personal tax returns, personal financial statements that list your assets and liabilities, and a résumé highlighting your prior experience.

2. Identify and analyze your target business

Once you identify a target, perform due diligence and obtain an independent valuation to determine a fair price, which may differ significantly from the asking price. With an accountant or financial adviser, review at least three to five years of the business’s financial statements and business tax returns to verify its past and existing cash flow and profitability.

3. Prepare a business plan

Your business plan for an acquisition demonstrates your transition strategy and growth potential—proof to lenders that you’ve done your homework. It must include financial projections showing how the business operates now and how its future cash flow will cover all operating expenses plus the new loan payments.

4. Shop for the right loan

Now that your package is ready, you can approach lenders. Start by contacting an SBA-backed loans specialist at a local bank or credit union. Approach your current bank to see what traditional bank loans it offers. Explore online lenders and, if needed, consider asking the owner for seller financing to help cover part of the deal.

5. Complete the application and underwriting

For the formal application, submit your complete package—your plan, your personal financials, and all of the materials from the seller’s business. The lender will then evaluate and underwrite the loan. Credit approval can take anywhere from a few weeks to several months.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.