Most people don't have enough cash to buy a business outright. The good news is there are several financing options available. This guide covers the main ways to fund a business purchase.
Seller Financing
Seller financing is when the current owner loans you part of the purchase price. This is one of the most common ways to buy a small business, and it's often the easiest to arrange.
Here's how it typically works: You put down 20-30% of the purchase price, and the seller finances the rest. You make monthly payments over 3-7 years, usually with interest.
Why sellers do it: They want to sell, and offering financing makes their business more attractive. They also spread out their tax liability over multiple years instead of paying taxes on the full sale price at once.
Why it's good for buyers: Easier to qualify than bank loans, faster to arrange, and often more flexible terms. The seller knows the business and may be willing to work with you if you hit a rough patch.
What to watch for: Make sure the interest rate is reasonable (typically 4-8%), and understand what happens if you default. Usually the seller can take the business back.
Bank Loans
Traditional business loans from banks are another option, though they can be harder to get approved.
Banks typically require:
- Good credit score (usually 680 or higher)
- Down payment of 20-30%
- Strong financials from the business you're buying
- Personal guarantee (you're personally responsible if the business can't pay)
- Collateral (assets the bank can take if you default)
Interest rates vary but are usually 6-10% for small business loans. Terms are typically 5-10 years.
The approval process can take 30-90 days. Banks will thoroughly review the business's financials, your credit, and your ability to run the business successfully.
SBA Loans
The Small Business Administration (SBA) guarantees loans made by banks to small business buyers. This reduces the bank's risk, making it easier for you to get approved.
SBA loans have several advantages:
- Lower down payment requirements (usually 10% instead of 20-30%)
- Longer repayment terms (up to 10 years for equipment, 25 years for real estate)
- Competitive interest rates
- Can be used for working capital, not just the purchase price
The most common SBA loan for business purchases is the 7(a) loan program1. Maximum loan amount is $5 million, though most are smaller.
The application process is more involved than regular bank loans. You'll need detailed financial information, a business plan, and personal financial statements. Expect the process to take 60-90 days.
Not all banks do SBA loans. Look for SBA Preferred Lenders, who can approve loans faster because they've been pre-approved by the SBA.
Alternative Lenders
Online lenders and alternative financing companies offer another option, though usually at higher interest rates.
These lenders are often more flexible with credit requirements and can approve loans faster than banks. However, interest rates are typically 10-25%, and terms are usually shorter (1-5 years).
This can be a good option if you need financing quickly or don't qualify for traditional loans, but make sure you can afford the payments. High interest rates can strain cash flow.
Investors and Partners
Bringing in investors or partners is another way to fund a purchase. They provide capital in exchange for ownership in the business.
This can work well if:
- You need more capital than you can borrow
- You want partners with business experience
- You're comfortable sharing ownership and decision-making
Be clear about roles, responsibilities, and how decisions will be made. Get everything in writing with a partnership or operating agreement.
Home Equity and Personal Assets
Some buyers use home equity loans or lines of credit to fund part of the purchase. This can work, but be careful.
You're putting your personal assets at risk. If the business fails, you could lose your home. Make sure you're confident the business can generate enough cash flow to cover the payments.
Interest rates on home equity loans are usually lower than business loans, which is an advantage. But the risk to your personal assets is significant.
401(k) Rollover (ROBS)
Rollovers for Business Startups (ROBS) lets you use retirement funds to buy a business without paying early withdrawal penalties or taxes2.
This is complex and requires setting up a C-corporation and a qualified retirement plan. You'll need professional help from a ROBS provider, and there are ongoing compliance requirements.
This can be a good option if you have significant retirement savings and want to avoid debt, but it's not for everyone. You're risking your retirement savings, and there are strict rules to follow.
Combining Financing Sources
Many buyers combine multiple financing sources. For example:
- 20% down payment from personal savings
- 50% from bank or SBA loan
- 30% seller financing
This approach gives you flexibility and can make the deal work when one source alone wouldn't be enough.
What Lenders Look For
Whether you're applying for a bank loan, SBA loan, or seller financing, lenders want to see:
Strong business financials: Consistent revenue, real profits, and positive cash flow. They'll want to see at least 2-3 years of financial records.
Your ability to run the business: Relevant experience, education, or a solid plan for learning. If you've never run a business, you'll need to show how you'll succeed.
Good credit: Your personal credit score matters, especially for bank loans. Pay down debt and fix any errors on your credit report before applying.
Realistic projections: Lenders want to see that the business can generate enough cash to cover loan payments and still leave you with income.
Getting Started
Start exploring financing options early, even before you find the business you want to buy. Getting pre-approved can make you a more attractive buyer and speed up the process once you find the right business.
Talk to multiple lenders to compare rates and terms. Don't just go with the first offer. Small differences in interest rates can add up to thousands of dollars over the life of the loan.
Consider working with a business broker or consultant who specializes in financing. They can help you navigate the process and find the best options for your situation.
Red Flags to Avoid
Be cautious of:
- Lenders asking for upfront fees: Legitimate lenders don't charge fees before approving a loan
- Guaranteed approval: No legitimate lender guarantees approval without reviewing your application
- Pressure to act quickly: Take time to understand terms and compare options
- Unusually high interest rates: If it seems too good to be true, or if rates are much higher than market rates, be suspicious
Next Steps
Ready to start looking for a business? Browse our business listings to see what's available. When you find businesses you're interested in, ask about financing options during your initial conversations.
For more information on buying a business, check out our Buyer's Guide.