Buy An Existing Business With Bad Credit
If you need a loan to buy an existing business, getting approved with bad credit is challenging. However, buying an existing business often helps a new business owner jump over hurdles where many new businesses falter. The business assets and proven revenue stream potentially strengthen your loan prospects.
buy an existing business with bad credit
Before you jump into applying for loans to buy a business, examine your own credit. You may assume you have bad credit, but it might not be as bad as you think. Take the opportunity to clean up any errors or pay down other debts to improve your credit profile.
Personal credit reports are available through any of the three reporting agencies: Experian, Equifax and TransUnion. You can also check with an existing bank or credit card company to see if it offers free credit reports. Review the report for any errors. Contact reporting companies about errors with proof of payment, such as a receipt for having paid a bill on time.
Request budget items such as payroll and lease information. Gather any existing debt owed on the business including open lines of credit. You need to know what the business pulls in and what its expenses and liabilities are.
Whether you are starting a new business or buying an existing business, make an appointment to review the entire plan with a Small Business Administration counselor. This person may be able to improve the plan so it better suits what a lender seeks. The counselor also has relationships with lenders who specifically provide SBA loans.
Whether you go through the SBA or go directly to a bank or credit union, make your package as professional as possible and look like a business owner when you meet with lenders. While you are a customer, lenders view their role more as investors and want to work with professionals. Complete the application and present the entire package as supporting documentation.
If you are denied a loan, ask the lender about having a credit partner. A credit partner is a co-signer to the loan, using their positive credit and maybe industry experience as a mentor to the company. You will probably need to give up a percentage of ownership to get a credit partner, but this might be the only way to establish the credit to buy the business. If you still can't get a loan, look to private investors within your network or microlenders involved with local economic development agencies in your area.
With more than 15 years of small business ownership including owning a State Farm agency in Southern California, Kimberlee understands the needs of business owners first hand. When not writing, Kimberlee enjoys chasing waterfalls with her son in Hawaii.
This head start comes at a cost, however. And if your personal savings don't cover the cost of your purchase, chances are you'll be looking to apply for a business loan. Depending on a range of factors, you may be able to get a loan to buy an existing business, but first you'll have to size up your needs and requirements, prepare the right information and documents, and shop for the right lender.
When you're buying an existing business, lenders want to know about both you and the business you want to buy. That's fair: Up to this point, you and your prospective business have had two entirely independent histories.
As they would with any loan, lenders want to know about your personal credit history. Do you have a history of successfully managing debt? Do you handle credit responsibly? They'll want information about your income, your current business (if you have one) and any relevant experience that makes you a good candidate for running this new business successfully. Here's a short list of items to prepare:
If you already own a business and are looking to acquire another to expand operations or change your business model, lenders will also want to know about the financial health of your existing company. Check with your lender for a full list of financial information they require, but be prepared to provide the following:
Further, they'll want to make sure your business strategy is sound and that your proposed business purchase has the income potential to allow you to repay your loan. Proving that could require showing:
Before you can apply for a loan, you need to assemble some basic information. Many of the answers you need will require input from the seller. Although this may seem cumbersome, it's also an opportunity to get some cold, hard facts about the business you're hoping to buy.
Business loans are available from a variety of sources. Your current bank or credit union (or the one your prospective business uses) is an obvious starting point, but you can also shop around for small business lenders. Online lending platforms like Fundera connect small business borrowers with multiple lending sources for a range of business loans including Small Business Administration (SBA) loans, business lines of credit and term loans. According to Fundera's website, borrowers with at least $150,000 in annual revenues, one or more years in business and credit scores of 600 and above have been successful in securing loans.
For many small business owners, SBA loans work where other lending options do not. The SBA doesn't make loans to small businesses; instead, it guarantees loans from lenders like banks and credit unions, which takes some of the risk out of lending. As a result, SBA loans typically have favorable interest rates, but also have specific criteria borrowers must meet to qualify. Look over the SBA's 7(a) Loan Application Checklist to learn more.
Some alternative lenders also offer small business financing and may offer business loans to entrepreneurs who have at least $50,000 in sales, have been in business for 12 months or more, have no bankruptcies or tax liens and own at least 20% of their business.Additional Ways to Finance Buying a BusinessGetting a loan to fund a business purchase isn't your only option. If you can't find a willing lender or your approved loan amount doesn't cover the cost of the business, consider these alternative funding ideas:
Use your personal funds. In addition to your regular savings, you can consider using investments and other sources of cash to help pay for your new business. Just be wary of tax consequences and the risk of depleting your emergency fund or nest egg: Even the best business opportunity represents some risk. You can also take your reserves of personal credit into account, although financing large sums of money at high credit card interest rates isn't an ideal way to fund your business as it can easily cause your credit utilization to shoot up, which could have big credit implications.
Small business loans can be used for a number of purposes, but borrowing may not be the best option for your business. This is especially true if your business is short on cash and may struggle to make loan payments. If you struggle to define how the loan will improve your business, lenders will be less inclined to extend funds.
In general, you can get the best small business loans from traditional banks, credit unions and online lenders. If you have bad personal credit, search for providers with less strict qualifications than competitors. For example, some online lenders have lower credit score requirements than traditional banks and credit unions. Likewise, shopping for financing may involve considering business lenders that offer secured loans with fewer requirements.
Lenders require applicants to provide documentation to verify their identity, business details and overall ability to repay their debts. For business loans, this often involves providing personal and business tax returns going back at least two years, as well as business financial records for the past three years or more. Similarly, businesses applying for invoice factoring may need to provide accounts receivable and accounts payable aging reports.
Getting a business loan with bad credit can be challenging, but there still are several financing options to consider. These are the most common types of loans for business owners with bad personal credit:
Kiah Treece is a licensed attorney and small business owner with experience in real estate and financing. Her focus is on demystifying debt to help individuals and business owners take control of their finances.
The short answer: It depends. Having bad credit makes the process of buying a business more difficult. It will require more work. It will require persistence. However, getting a business acquisition loan while having bad credit is not always impossible. In this article, you will learn:
Credit is measure of trust. Credit measures how much a lender trusts you with its money. It is measured by looking at a number of variables and converting them to a number. This number is called the FICO score.
Since credit is a measure of how that person manages their personal life. Lenders assume that how you manage your personal life is a strong indication of how you will manage your business. It may not be a perfect measure, but lenders rely on it.
With that in mind, your job is simple. You must present a solid business case so that the lender views you as a low risk. Frankly, few people do this. Even those with good credit. You can use this to your advantage. This is how you can differentiate yourself and increase your odds of winning.
Getting a loan to purchase a business is an uphill battle for everyone, regardless of credit. There are no guarantees of success. Frankly, even good credit does not guarantee success. You need to accept this fact.
Each lending institution has its own loan requirements. As a rule, your credit score should be at least 650. Some institutions can work with lower scores. Do your due diligence. You may need to speak to a number of institutions before you find one that will work with your score.
Often, LBO transactions require a down payment as well. However, some transactions have been done with no down payment. These are very hard to find and close. Basically, you must find a business that is willing to sell for a cost that is lower than those of its assets. 041b061a72