20 February, 2025 | 14:17 IST
Entrepreneurs can grow their wealth by investing in various businesses and finding new ways to seek cash inflows. One of the best ways to grow is by purchasing an established business.
An established business offers an existing customer base, a product portfolio and streamlines services, which could be a great foundation the future growth
To buy a business, you need a solid financial background. There are several reasons why you might need a loan to buy a business. These include preserving cash flow, managing risk, fuelling business growth, and taking advantage of tax benefits.
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1. Assess your financial situation
The first thing a lender will look into before giving you a loan is your financial situation. Make sure your finances are in order. Lenders will consider cash flow, debt-to-income ratio, and credit score. Having sound financial standing can improve your chances of loan approval.
2. Explore various types of loans
It's essential to explore various loan options, as each comes with specific terms and conditions:
-Small business loans: These are government-backed loans that generally offer extended repayment periods and low interest rates. While the application process can be lengthy, they are often used for purchasing businesses and tend to have fewer restrictions.
-Conventional bank loans: Traditional bank loans are another option. These loans usually have stricter requirements, such as a solid credit history and prior business experience.
-Seller financing: In some cases, the seller may offer financing directly, meaning you pay them over time rather than getting a loan from a bank.
-Alternative lenders: Although private investors and internet lenders may provide loans more quickly, they may have higher interest rates.
3. Apply for the loan
Once you have identified the right loan type, prepare a strong business plan that outlines how the loan will help your business grow. Then, submit your application along with required documents like tax returns, financial statements, business valuation, and other relevant paperwork.
4. Lender evaluation
After you submit your documents, the lender will review your financial situation and assess the health of the business you're looking to purchase. Based on this evaluation, they will decide whether to approve the loan.
5. Loan approval
The final step is closing the loan. This means officially finalising the loan agreement with the lender where you need to carefully review and sign the agreement. It is the loan contract which will include interest rate, loan amount, repayment schedule, and additional terms and conditions.
Securing a loan to buy an existing business can be challenging, but it’s possible with the right approach and preparation. The key factor lenders focus on is your credit score, which gives them an idea of your ability to repay the loan on time-based on your past credit behaviour.
Another factor that can help to streamline the process is the quality of the business you are purchasing. Banks and other lenders are more likely to offer a loan to a business that is currently profitable and has sound financials because they see it as a reduced risk.
If the business is in a high-risk industry or facing financial difficulties, lenders may be hesitant to approve the loan. Many lenders need personal guarantees or collateral, which might be problematic if you don't have enough assets to support the loan.
Moneycontrol has partnered with eight top lenders to offer seamless, 100% digital loans up to ₹50 lakhs. The application process is easy: enter your details, complete the KYC verification, and select your EMI options. Based on your employment status, you could receive loans with interest rates starting as low as 10.5% per annum.
ALSO READ: How to Secure the Best Business Loan Interest Rate
Obtaining a business loan to purchase an existing firm is simpler than securing funding for a new venture. This is because the lender can assess the financial condition of the business you want to acquire. Your credit score still plays a crucial role. If your score is low, it may be difficult to secure a loan.
The higher your credit score, the better your chances of securing favourable loan terms, including lower interest rates and better repayment conditions.
A credit score of 700 or higher increases your likelihood of approval. If your score falls between 650 and 699, you may still qualify but face higher interest rates or less favourable terms. A credit score below 650 can make it challenging to secure a loan, especially through traditional banks, as lenders may view you as a high risk client.
ALSO READ: Business Loan: Key documents needed to secure financing, check full list
If you are looking forward to acquiring an existing business, Moneycontrol offers instant loan up to Rs 50 lakhs from eight lenders in a completely digital process through the Moneycontrol app. The interest rates start at as low as 10.5% per annum and the amount can be credited into your account almost instantly.
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