Getting financing to buy a business can be one of the most important aspects of buying a business. Not too many buyers have all the cash for a purchase, and not many business owners are willing to take back a sizeable note. Buyers need to be prepared well in advance with the information below to increase the odds of getting a loan to buy a business.

Lenders look at many different things in both the business buyer (borrower) and in the business that is being purchased. Below we take a look at some key factors that make a difference whether you receive financing to buy a business:

1. Buyers need between 15%-30% for a down payment, depending if there is real estate with the business or if just the business is being sold by itself. The down payment can come from many different sources: savings, a gift (usually only family members), or retirement plan money. You can not borrow the money for your down payment!
   
2. Buyers need to have good-to-excellent credit. Any bankruptcies or many late payments will usually nullify the chances of a borrower no matter how good the other criteria looks. Get any “dings” in your credit history removed or fixed well before the buying process. Early in the lending process, the lender will be running a credit check to see if you qualify.
   
3. Lenders like a borrower who has experience in the business they are buying or in a related industry. Lenders also like management experience or buyers who have previously owned a business and know what it takes to grow and keep a business on track. You will need to provide a resume of your work experience. Have one ready that focuses on your industry strengths and management experience.
   
4. Buyers should write up a mini business plan on the business they are thinking of buying. Lenders usually require this to make sure you know about the business and industry you are buying into and what you are going to do with the business once you own it. These plans can be a short outline (3-5 pages) of where the business has been, what is happening with it now, and what you plan to do to enhance it.
   
5. Positive cash flow (or seller’s discretionary income) must cover the debt service of the loan and provide an adequate income for you to support yourself and your family, otherwise you won’t get the loan. Lenders look closely at the tax returns of the business being sold – so if the seller is playing any games (not showing income or claiming excess deductions on their business tax returns), chances are you won’t get a loan. Ask to review the business tax returns early in the process of looking at a business and see if you can “add back” sufficient net income, depreciation, interest and owner’s salary to pay back the loan.
   
6. Does the buyer have equity in any real estate? Although not imperative to the lenders we work with, this can strengthen the deal if the other parts of your loan application are weak (such as the down payment, work experience or a lower credit score).
   
7. Does the business that’s being sold have management in place or key employees who will stay? Try to get commitments from exiting key personnel and management to stay for a period – this shows the lender continuity and less risk after you take over.
   
8. Make sure there is adequate training after the sale. Lenders look for a training period to be anywhere from 1-12 months, depending on the type of business you are buying, your past work experience and how it relates to the business you are purchasing. Make sure you negotiate this point carefully in the purchase agreement.
   
9. Will the seller take back a note? If the owner is willing to take back a note (even a small one for 10-15%), it shows the lender that the owner is confident in the deal and is willing to take a chance on the buyer.