Borrowing Money To Buy A Business

Posted on Monday 16 August 2021


Borrowing Money To Buy A Business

Becoming an entrepreneur isn’t always about starting your own business from scratch. Many entrepreneurs get their start by buying a business that’s already in place! It’s a great way to eliminate much of the stress, time, and financial capital it takes to build one from the ground up.

But buying a business is anything but cheap. It takes thousands of dollars to buy a business (sometimes even more), which might not be sitting in your checking account. Unless you’re lucky enough to be a millionaire, if you want to buy a business, you’re going to have to borrow some money.


Before you dive right into buying a business, there are a few questions you’ll have to answer first.


For example, what kinds of documentation and paperwork will need to be filled out? What will you need in order to apply for a business loan? More importantly, where can you borrow money to buy a business? Keep reading to find out how you can become an entrepreneur by borrowing money to buy a business of your own.

Get your finances in shape before borrowing

As a potential new business owner, your personal finances are going to be under a much more detailed lens. Buying a business is a big deal, and everything from your bank statements to your credit score are fair game for scrutiny.

That means you’ll want to make sure that your financial health is as strong as possible before you take the next steps to buy a business. Some examples of what your lender will look for include:

Personal credit score

When was the last time you checked your personal credit score? Do you have any outstanding collection notices or unpaid debts? Get up close and personal with your credit score before you borrow money to buy a business.


Make sure that there aren’t any errors on your report – and if you find one, dispute it right away so that it can be removed. Most importantly, keep paying your credit card bills on time each month

Debt

We all carry a little bit of debt, whether it’s from credit cards, personal loans, mortgages, or student loans. Debt isn’t always bad (in fact, there are some good reasons to have a little bit of debt), but the key is keeping your debt manageable in comparison with the money you’re earning.


This is what’s called a debt-to-income ratio: it’s how much you earn each month against how much you owe. If your debt-to-income ratio is too high, you may not be eligible to borrow money to buy a business. Putting together a debt reducing plan can help you decide how to prioritize your payments (and, with any luck, get rid of a few debts before starting the loan application process).

Financial statements

Just like with applying for a mortgage, borrowing money to buy a business means that you’ll need to show proof of income.

Depending on your financial institution, that could mean submitting things like pay stubs, bank statements, and personal tax returns. If you’ve already got an existing business, you may have to submit additional documentation, such as profit/loss statements, cash flow statements, and business tax returns.


This also applies to the business that you want to buy, too. A lender will want to make sure that the business is valuable and can generate income (in other words, that you’ll be making enough money through the business in order to pay your loan).


Be prepared to provide a business plan, which should include anywhere between three to five years of financial projections. You’ll also want to sit down with an accountant and an attorney to get an accurate valuation of the business. Not only does this ensure that you’ll be paying a fair price, but it also gives key insight into things like licences and tax implications.

Collateral

Filling out and submitting an application is only one piece of the process – in order to borrow money to buy a business, you’ll need to have cash on hand to use as a downpayment. Each lender has different requirements, but most ask for 10 percent down.

What happens if you don’t have the cash flow to make the full downpayment? Well, another option could be to secure your business loan with collateral. You could use the business itself as collateral, or any related equipment, vehicles, and real estate.


Another option is to use personal assets as collateral, like your home or your vehicle. Be wary about what you put up as collateral – should the business fall on hard times and you can’t make your loan payments, your lender would then be able to take your collateral.

Where to borrow money to buy a business

Once you’ve got your personal finances in shape – including all documentation – it’s time to decide where to borrow money. There are a wide range of options for small business loans in Canada, and like many financial products, the rates and terms of your loan all depend on the bank that you choose. Here are some ideas to get you started:

  • The Business Development Bank of Canada (BDC) provides loans that are tailored to buying a company or merging an existing company with a new one. Financial specialists will work one-on-one with you to find the right loan for your needs – and because they don’t take personal assets as collateral, you can buy a business without putting your home on the line.

  • The Canada Small Business Financing Program is a government-sponsored program that helps small businesses and startups hit the ground running. You can apply for this program through any bank, credit union, or caisse populaire in Canada with a maximum loan amount of $1,000,000.

  • An Indigenous Entrepreneur loan from BDC offers up to $350,000 for qualifying Indigenous entrepreneurs to cover the costs of starting a business, expanding an existing business, marketing, buying materials and equipment, and more.

Borrowing money to buy a business is no small task – but the payoff in the end is more than worthwhile. If you’re having trouble deciding where to get a loan from, don’t forget to check with your bank to see what kinds of business loans they offer.

If you have a positive borrowing relationship with them (or if you’ve been a banking customer for a long time), your bank may be more inclined to accept your loan application – and they may even give you a great rate, too!