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Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative is to enter an existing business by buying from the current owner. Some of the advantages of buying a business include easy financing, an established customer base, and existing cash flow.
How To Obtain A Loan To Buy A Business
Buying a business is different from buying a franchise. Owners have a business model that is proven to work. However, when you’re buying an independent business, it’s important to show the lender that you, your previous business experience, and the business you want to buy are a successful combination.
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As lenders can see the performance record of an existing business, it is generally easier to obtain a loan to purchase an existing business compared to start-up financing. However, details about your personal credit history, experience and the business you are acquiring are still important.
With credit reports and credit scores, lenders can assess how you’ve managed credit in the past and gain insights into how you’ll handle it in the future. Your education and experience will also be evaluated.
Good Credit Score: The higher your credit score, the better your chances of approval and the more favorable the loan terms. However, borrowers with bad credit still have loan options.
Solid credit history: Lenders look to see if you have a history of repaying your loans. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you don’t pay the full amount are covered.
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Business Experience: Having worked in the same industry as the business you want to buy would be helpful. Related education can also be viewed positively.
When buying a new operation, having a track record of running other successful businesses can have a positive impact on lenders.
Record of income generation: Business financial statements can help lenders to prove that your current or past businesses are well managed and profitable.
Positive Credit Record: Lenders review business credit scores and reports to check creditworthiness and find liens, early payments, bankruptcies and late payments related to your other businesses.
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Just because a business works doesn’t mean it’s a good investment. Lenders will ask for documentation provided by the current owner to assess the health of the operation.
Value of the business: Like you, your lender will want to make sure you’re buying a business of value and that you’re paying a fair price.
Past Debts: Lenders will be interested in a business’s past debts, including liens, various types of taxes, utility bills, and accounts receivable.
Most lenders will tell you what to include in the loan application package, but there are some personal documents that are commonly requested, as well as documents related to the business you want to buy.
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The following documents are used to evaluate your personal finances, business history and plans to operate the business after purchase:
Compared to finding a loan to start a business, getting financing to buy an existing business may be easier. Here are three popular financing options for business loans:
Banks generally offer lower interest rates and better terms for business loans. To qualify for this type of loan, you generally need a strong credit history, and the existing business must have been in operation for a certain minimum number of years and generate a minimum annual revenue set by the lender.
If borrowers don’t qualify for a traditional bank loan, SBA loans, which are partially guaranteed by the Small Business Administration, may be the next option to explore. These loans are easier to qualify for as there is less risk to the lender. Banks and credit unions often offer SBA loans in addition to traditional bank loans.
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Another option to consider is online business loans. Compared to bank and SBA loans, online business loans may offer more flexibility when it comes to qualifying. Minimum credit score requirements can be as low as 600, and sometimes even lower. Generally, interest rates are higher than those available on traditional bank loans.
About the Author: Lisa Anthony is a small business writer with over 20 years of experience in banking and finance. Read more
Business Tax: Compare the Best Options by Randa Kris Read More Business Loan Calculator: Steve Nicastro, Tina Orem Estimate Your Interest Rate Payments Read More Everywhere you turn, you hear how bad it is to carry debt. So naturally, it’s logical to think that buying a home with cash or sinking as much cash into your home as possible to avoid the massive debt associated with a mortgage is a smart choice for your financial health.
But there’s a lot to consider when thinking about buying and financing a home outright. Here are some key differences between using cash and taking out a mortgage to buy a home.
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Paying off a home eliminates the need to pay interest on the loan and closing costs. “There are no mortgage origination fees, appraisal fees or other fees charged by lenders to appraise buyers,” says Robert Semrad, senior partner and founder of Chicago-based bankruptcy law firm DebtStoppers.
Paying with cash is usually more attractive to sellers. “In a competitive market, a seller will get a cash offer over other offers because they don’t have to worry about the buyer backing out because financing is denied,” says Peter Grabel, managing director of MLO Luxury Mortgage Corp. In Stamford, Conn., a cash home loan has the flexibility to close faster (if desired), which can be attractive to a seller.
For the seller, these benefits may not come without a price. “A cash buyer can get the property for less and get a sort of ‘cash discount,'” says Graebel. A cash buyer can purchase a home with cash and then choose to refinance after they have already completed the home purchase. This allows them to get the best of both worlds: an easy home-buying process in a hot housing market with many competitive offers and the long-term financial benefits of taking out a low-interest mortgage while investing their money.
A cash buyer’s home is not leveraged, which allows a homeowner to sell the home more easily—even at a loss—regardless of market conditions.
Concept Home Loan Customer Buy Home And Get Money From Bank Or Receive Money From Buyer Stock Photo
On the other hand, getting financing also has significant advantages. “Even if a buyer has the ability to pay for a home, it makes sense not to pay a lot of money to buy real estate,” says Graebel. Doing so may limit your options if other needs arise down the road. For example, if the home needs major repairs or renovations, it may be difficult to get a home equity loan or mortgage because you don’t know how your credit score will fare in the future and how much the home will be worth. Then value, or other factors that determine approval for financing. While this is certainly something to keep in mind, the more equity you have in your home, the easier it is to get a home equity loan or home equity line of credit (HELOC).
Selling a home bought with cash can be a problem if the owners are stretched too far financially to buy it. “Cash buyers should make sure they have enough cash reserves to put down a deposit on a new home if they decide it’s time to sell,” says Greibel.
In short, “cash buyers need to make sure they leave plenty of cash flow,” says Graebel. By choosing to go with a mortgage, you can give yourself more financial flexibility. Using a mortgage calculator is a good resource for budgeting some costs.
Paying off a mortgage can also provide tax benefits to homeowners who itemize deductions against the standard deduction. Although you shouldn’t opt for a mortgage to get the deduction, the reduced tax liability will never hurt.
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“In most cases, mortgage interest payments are tax-deductible,” says Semrad. The Tax Cuts and Jobs Act (TCJA), passed in 2017, however, nearly doubled the standard deduction, making it unnecessary for many taxpayers to itemize.
Of course, with a mortgage, you’ll pay more overall because it comes with interest payments that add up over time. But Semrad also notes that, depending on the state of the stock market, it may not be financially prudent to save on mortgage interest by paying cash. You can save less money than you would have if you had taken out a mortgage
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