Businesses need money. Startup money, working capital, acquisition financing. There’s no business that works without it. Loans are a typical way to satisfy such needs.
Two categories of loans are common for the transfer of a business: Acquisition loans and working capital loans. Acquisition loans run for five to twenty years or longer. Working capital loans usually run for one to three years and are renewed or renegotiated at maturity. When buying a business, buyers sometimes forget about working capital. Don’t. It’s like forgetting life blood. You can’t survive without it.
Odds are the purchase deal involves some cash. Odds are the buyer doesn’t have it tucked beneath the mattress in the spare room. So loans are a reality of the process. But be consoled by the fact that it’s easier to get a loan for an existing business than for a startup venture due to the business’ track record, assets and its ability to attract other financing (such as a carrying loan by the seller).
Buyers should research banks in the same way they research everything else. Banks specialize. Some shy away from all business loans, some radiate toward only large business loans. Look for a bank that is friendly to your situation, familiar with your type of loan and willing to continue a relationship with you after the close. Banks need to make loans to stay in business. Under the right circumstances, they will compete for your business. Let them. While interest rates are likely the same from bank to bank, security interests, points, origination fees and other charges may vary widely. Shop around, and don’t be afraid to negotiate your terms.
For more information on this topic, please read my book, Buying & Selling a Business.