Regardless of your credit score, getting a loan to purchase a business has become harder as lenders are more selective of who they lend to than they were before the economy crashed in 2008. A FICO score of 700 is the average lending threshold. For those with scores below 700 it can be difficult to obtain financing. However, it is certainly possible to get a loan to purchase a business even if you have less than perfect credit. However, it is important to be realistic about your situation and to take several steps to make yourself more appealing in a lender’s eyes. It is important to do your research, strategize, and be prepared and to structure a smart deal. Let’s examine these steps in further detail.
Do your research and strategize. Before you get pre-qualified know your credit score. You are entitled to one free credit report per year. If your score is low find out why and address the negative aspects to help improve your score. A specialty broker or business financing specialist can be of assistance as they know what lenders are looking for and they can provide you with advice on what you need to do to improve your score.
Certain types of businesses are considered high risk to lenders whereas others are seen as less risky. If you have less than perfect credit selecting a business that is considered to be less risky ups your chances of being approved for financing.
Be prepared. After taking the necessary steps to improve your credit score be sure to have an explanation for your score. Did you go through a divorce or have a family member fall ill? Although a good explanation will not erase a poor credit score it will help build credibility with a Lender.
Prepare a business plan. A solid business plan shows how you will run the business and how the business will make money. Essentially lenders want to have confidence that you know what you are doing and that you will be able to pay back the loan.
Structure a smart deal that is going to appeal to a financial institution. Lenders prefer to see deals in which the owner is also holding a note for part of the purchase price and offering training to the new owner for a period of time after the sale closes. This demonstrates that the current owner has faith that the new owner will be able to run the business successfully which will allow the borrower to pay back the loan. You may also need to be prepared to offer up collateral in order to secure financing.
Just because you have less than perfect credit doesn’t mean you can’t secure business purchase financing. Take the necessary steps mentioned above and consult with a specialty broker or business purchase financing expert to secure financing for your business purchase.
About The Author: Peter Siegel, MBA is the Founder & President of BizBen.com a website for businesses for sale, businesses wanted to buy, resources, & articles and the BizBenNetwork Online Community. He advises and consults with business buyers, business sellers/owners, brokers, agents, investors, & advisors on a daily basis. Reach him direct at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a purchase of) small to mid-sized businesses.