So, you’ve decided that you want to take out a small business loan.
\r\nYou know all about those pesky questions lenders will ask you, like, “What’s your annual revenue?” and, “What’s your credit score?” And you’ve got a billion documents prepared, from your bank statements to your balance sheets.
\r\nIn other words, you’re completely prepared for this application. You’ve got as much of a chance as anyone else with the same business background and financials, right?
\r\nWell…not quite. Not all loan uses were created equal, and two loan uses, especially, are difficult to pick up funding for. If you’re on the lookout to take out a loan in order to buy an existing business or buy out a partner in your current business, you’ve got a bit of a challenge ahead.
\r\nBut while it might not be easy, seeking funding to purchase a business or buy out a partner can be done. Read on to learn why it’s hard in the first place, and what you can do to compensate.
\r\nWhat’s the big deal? There are two main issues with taking out a loan to buy an existing business or buy out a partner. Let’s think like a lender and consider the common problems those two loan purposes lead to.
\r\nRelated Article: Bank Loan Request, Denied: Who Will Help Fund Your Business Now?
\r\nLenders rely on past data to make assumptions about a borrower’s ability to repay his or her loan in the future. Or, to put it simply, lenders think this way: “If Jackie made good financial decisions with her business in the past, then she’ll probably make good decisions in the future.”
\r\nYour annual revenue, credit score, bank statements, balance sheets all act both as proof that you knew what you were doing in the past and insurance that you’ll continue to know what you’re doing in the future.
\r\nJackie isn’t about to stop understanding her business’s financials once she secures that loan, instead, she’ll most likely use her extra capital wisely, and pay her lender back on time.
\r\nWhen it comes to purchasing a business or buying out a partner, this strategy that lenders use, and that everyone uses, really, isn’t quite as valid.
\r\nYou see, the question is, how does a lender know whether Jackie would be good at running a restaurant? Sure, she’s proven herself capable of managing a car dealership, but different industries have their own challenges, and she’s never had to deal with small daily transactions and perishable inventory.
\r\nYou get the idea. Past success can show your general financial and business acumen, but it doesn’t go as far.
\r\nThe workaround to that challenge? It helps to have experience in the industry of the business you intend to purchase, or to be able to prove a similarity between your resume and that of an ideal owner.
\r\nThe elephant-in-the-room question that a lender will be grappling with: \"If the business you want to acquire didn’t succeed, why will yours?\" Answer this convincingly, and you’ll be doing just fine.
\r\nAnd likewise for buying out a partner. How can our hypothetical lender be sure that it was Jackie who made her car dealership such a success, and not her partner, Bill?
\r\nFor all the lender knows, Bill had all the contacts, the automotive wherewithal, and the strategic intuition that put their business into first gear, but it’s Jackie who wants to buy out Bill’s shares and take over the driver’s seat. That’s a big risk to take. Too big, for plenty of lenders.
\r\nRelated Article: Why Collateral Matters When Getting a Small Business Loan
\r\nUsually, when you take out a business loan, you’ve got a plan figured out. You need (x) amount of cash to start that plan, but when it finishes, you’ll have made (x+y) back. More than enough to pay back your loan, plus interest.
\r\nIn finance-speak, the return on investment (ROI) of your loan purpose will be greater than (or at the very least, equal to) the cost of your loan. It doesn’t make sense to take out a loan for a new piece of equipment if you don’t think that new piece of equipment will return enough money for you to pay back that loan, does it?
\r\nYour business plan will show exactly why it does make sense, in that case, or you can kiss that loan goodbye, most of the time.
\r\nMaybe you can see where this is heading. Both purchasing an existing business and buying out a current partner are loan purposes that don’t connect directly with a high ROI.
\r\nIn each case, that money the lender gives you? It goes straight to the owner or partner you’re taking the place of, who immediately departs the scene, pockets lined with money that you can’t use to buy equipment, stock inventory, set up a marketing plan, or do anything at all with.
\r\nSo in conclusion, having a solid financial and business background might not be enough, you may have to get persuasive with your arguments if you’re going to convince a lender to back one of these loan purposes. Good luck!
\r\nRelated Article: 5 Reliable Tips for Selecting the Right Business Loan
\n","docType":"article","guid":"articles_38332ec0ba1dfd618c723064202c74d4","lastModified":"2016-02-02T19:00:00.000Z","published":"2016-02-02T19:00:00.000Z","structuredData":null,"subtitle":null,"template":"legacy","title":"Before You Sign: Can A Business Loan Help You Buy Out a Partner?","type":"article","author":{"avatar":null,"bio":"Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Learn more at www.fundera.com","name":"Meredith Wood","image":null,"slug":null,"social":{"facebook":"http://www.facebook.com/fundera","linkedin":"http://www.linkedin.com/in/meredithannwood","twitter":"fundera","website":"http://www.fundera.com"},"status":"enabled","title":null,"type":"Old BDC Member","user":{"imagePath":"https://staging.business.com/images/uploads/user/profile/916001f5a4e90886bd1828f6f6f4f0823190f.jpg","profile":{"company":"","jobTitle":"","website":""}}},"breadcrumbs":null,"channels":{"primary":{"name":"Finance","slug":"finance"},"sub":{"name":"Funding","slug":"funding"}},"meta":{"robots":"index, follow","description":"If you're looking to buy an existing business or buy out a partner with a business loan in your current business, you’ve got a bit of a challenge ahead.","title":"Business Loans for Buying a Business - business.com"},"parsedContent":{"toc":[],"json":[{"component":"p","children":["So, you’ve decided that you want to take out a small business loan."]},{"component":"p","children":["You know all about those pesky questions lenders will ask you, like, “What’s your annual revenue?” and, “What’s your credit score?” And you’ve got a billion documents prepared, from your bank statements to your balance sheets."]},{"component":"p","children":["In other words, you’re completely prepared for this application. You’ve got as much of a chance as anyone else with the same business background and financials, right?"]},{"component":"p","children":["Well…not quite. Not all loan uses were created equal, and two loan uses, especially, are difficult to pick up funding for. If you’re on the lookout to take out a loan in order to buy an existing business or buy out a partner in your current business, you’ve got a bit of a challenge ahead. "]},{"component":"p","children":["But while it might not be easy, seeking funding to purchase a business or buy out a partner can be done. Read on to learn why it’s hard in the first place, and what you can do to compensate."]},{"component":"p","children":["What’s the big deal? There are two main issues with taking out a loan to buy an existing business or buy out a partner. Let’s think like a lender and consider the common problems those two loan purposes lead to."]},{"component":"p","children":[{"component":"em","children":["Related Article:"]}," ",{"component":"Link","props":{"href":"http://www.business.com/business-loans/alternative-lending-sources-to-finance-your-dream-venture/"},"children":["Bank Loan Request, Denied: Who Will Help Fund Your Business Now?"]}]},{"component":"h3","children":[{"component":"em","children":["The Proof is in the Pudding"]}]},{"component":"p","children":["Lenders rely on past data to make assumptions about a borrower’s ability to repay his or her loan in the future. Or, to put it simply, lenders think this way: “If Jackie made good financial decisions with her business in the past, then she’ll probably make good decisions in the future.”"]},{"component":"p","children":["Your annual revenue, credit score, bank statements, balance sheets all act both as proof that you knew what you were doing in the past and insurance that you’ll continue to know what you’re doing in the future. "]},{"component":"p","children":["Jackie isn’t about to stop understanding her business’s financials once she secures that loan, instead, she’ll most likely use her extra capital wisely, and pay her lender back on time."]},{"component":"p","children":["When it comes to purchasing a business or buying out a partner, this strategy that lenders use, and that everyone uses, really, isn’t quite as valid."]},{"component":"p","children":["You see, the question is, how does a lender know whether Jackie would be good at running a restaurant? Sure, she’s proven herself capable of managing a car dealership, but different industries have their own challenges, and she’s never had to deal with small daily transactions and perishable inventory."]},{"component":"p","children":["You get the idea. Past success can show your general financial and business acumen, but it doesn’t go as far."]},{"component":"p","children":["The workaround to that challenge? It helps to have experience in the industry of the business you intend to purchase, or to be able to prove a similarity between your resume and that of an ideal owner."]},{"component":"p","children":["The elephant-in-the-room question that a lender will be grappling with: \"If the business you want to acquire didn’t succeed, why will yours?\" Answer this convincingly, and you’ll be doing just fine."]},{"component":"p","children":["And likewise for buying out a partner. How can our hypothetical lender be sure that it was Jackie who made her car dealership such a success, and not her partner, Bill?"]},{"component":"p","children":["For all the lender knows, Bill had all the contacts, the automotive wherewithal, and the strategic intuition that put their business into first gear, but it’s Jackie who wants to buy out Bill’s shares and take over the driver’s seat. That’s a big risk to take. Too big, for plenty of lenders."]},{"component":"p","children":[{"component":"em","children":["Related Article:"]}," ",{"component":"Link","props":{"href":"http://www.business.com/business-loans/why-collateral-matters-when-getting-a-small-business-loan/"},"children":["Why Collateral Matters When Getting a Small Business Loan"]}]},{"component":"h3","children":[{"component":"em","children":["Follow the Money"]}]},{"component":"p","children":["Usually, when you take out a business loan, you’ve got a plan figured out. You need (x) amount of cash to start that plan, but when it finishes, you’ll have made (x+y) back. More than enough to pay back your loan, plus interest."]},{"component":"p","children":["In finance-speak, the return on investment (ROI) of your loan purpose will be greater than (or at the very least, equal to) the cost of your loan. It doesn’t make sense to take out a loan for a new piece of equipment if you don’t think that new piece of equipment will return enough money for you to pay back that loan, does it?"]},{"component":"p","children":["Your business plan will show exactly why it does make sense, in that case, or you can kiss that loan goodbye, most of the time."]},{"component":"p","children":["Maybe you can see where this is heading. Both purchasing an existing business and buying out a current partner are loan purposes that don’t connect directly with a high ROI."]},{"component":"p","children":["In each case, that money the lender gives you? It goes straight to the owner or partner you’re taking the place of, who immediately departs the scene, pockets lined with money that you can’t use to buy equipment, stock inventory, set up a marketing plan, or do anything at all with."]},{"component":"p","children":["So in conclusion, having a solid financial and business background might not be enough, you may have to get persuasive with your arguments if you’re going to convince a lender to back one of these loan purposes. Good luck!"]},{"component":"p","children":[{"component":"em","children":["Related Article:"]}," ",{"component":"Link","props":{"href":"http://www.business.com/business-loans/5-reliable-tips-for-selecting-the-right-business-loan/"},"children":["5 Reliable Tips for Selecting the Right Business Loan"]}]}]},"resource":null,"sponsorship":null,"thumbnail":{"path":null,"caption":"Utah778 / Getty Images","isBlurred":true},"bestPicks":null},"related":{"relatedArticles":[{"title":"Before You Sign: Can A Business Loan Help You Buy Out a Partner?","canonical":"https://www.business.com/articles/can-a-business-loan-help-you-buy-out-a-partner/","slug":"can-a-business-loan-help-you-buy-out-a-partner","thumbnail":"https://www.business.com/images/channel/finance.jpg","dek":"If you're looking to buy an existing business or buy out a partner in your current business, you’ve got a bit of a challenge ahead.","lastModified":"2016-02-02T19:00:00Z","published":"2016-02-02T19:00:00Z","sponsored":false},{"title":"The Keys to Business Financing Success","canonical":"https://staging.business.com/articles/the-keys-to-business-financing-success/","slug":"the-keys-to-business-financing-success","thumbnail":"https://staging.business.com/images/content/54e/ecb113287b1ea5c8b4595/1500-0-","dek":"If you take the right steps to prepare, you can qualify for better financing with better interest rates. We'll show you how in this article.","lastModified":"2015-02-26T20:00:00Z","published":"2015-02-26T20:00:00Z","sponsored":null},{"title":"No Loan, No Problem: 4 Creative Ways to Fund Business Growth","canonical":"https://www.business.com/articles/4-creative-ways-to-fund-business-growth/","slug":"4-creative-ways-to-fund-business-growth","thumbnail":"https://www.business.com/images/channel/finance.jpg","dek":"There are creative ways to get business financing these days. Here are 4 very creative ways to get you started.","lastModified":"2016-05-10T18:00:00Z","published":"2016-05-10T18:00:00Z","sponsored":false},{"title":"No Loan, No Problem: 4 Creative Ways to Fund Business Growth","canonical":"https://staging.business.com/articles/4-creative-ways-to-fund-business-growth/","slug":"4-creative-ways-to-fund-business-growth","thumbnail":"https://staging.business.com/images/content/573/15acf3287b1193872195e/1500-0-","dek":"There are creative ways to get business financing these days. Here are 4 very creative ways to get you started.","lastModified":"2017-02-22T23:55:49Z","published":"2016-05-10T18:00:00Z","sponsored":null},{"title":"Bootstrapping or Investors: How Should You Fund Your Business?","canonical":"https://www.business.com/articles/bootstrapping-versus-investors/","slug":"bootstrapping-versus-investors","thumbnail":"https://www.business.com/images/content/5e5/0187d5a215e716e8b456a/1500-0-","dek":"Is one option better than the other when it comes to your small business?","lastModified":"2020-02-21T17:56:00Z","published":"2018-06-29T07:00:00Z","sponsored":false},{"title":"Why It’s So Hard to Succeed With Friend or Family Loans","canonical":"https://staging.business.com/articles/its-hard-to-succeed-with-friend-or-family-loans/","slug":"its-hard-to-succeed-with-friend-or-family-loans","thumbnail":"https://staging.business.com/images/content/557/9c1bf3187b1080e8b459a/1500-0-","dek":"Funding your small business through a traditional lending institutions is intimidating, but it's better than accepting a loan from a friend.","lastModified":"2017-02-22T23:55:52Z","published":"2015-06-11T19:00:00Z","sponsored":null},{"title":"Why It’s So Hard to Succeed With Friend or Family Loans","canonical":"https://www.business.com/articles/its-hard-to-succeed-with-friend-or-family-loans/","slug":"its-hard-to-succeed-with-friend-or-family-loans","thumbnail":"https://www.business.com/images/channel/finance.jpg","dek":"Funding your small business through a traditional lending institutions is intimidating, but it's better than accepting a loan from a friend.","lastModified":"2015-06-11T19:00:00Z","published":"2015-06-11T19:00:00Z","sponsored":false},{"title":"How to Start a Business: A Step-by-Step Guide","canonical":"https://staging.business.com/articles/4686-how-to-start-a-business/","slug":"4686-how-to-start-a-business","thumbnail":"https://staging.business.com/images/content/5c9/6d74c54d26d10478ba0d7/1500-0-","dek":"Follow this guide for aspiring entrepreneurs to get your business idea off on the right foot.","lastModified":"2019-03-27T00:34:00Z","published":"2019-03-19T00:28:00Z","sponsored":null},{"title":"Cold, Hard Cash: The Essential Steps to Securing a Business Loan","canonical":"https://staging.business.com/articles/the-essential-steps-to-securing-a-business-loan/","slug":"the-essential-steps-to-securing-a-business-loan","thumbnail":"https://staging.business.com/images/content/559/29d433187b1281f8b45a4/1500-0-","dek":"Business loans are critical for a number of industries. Before applying for one, here are four essential tips.","lastModified":"2015-06-30T14:00:00Z","published":"2015-06-30T14:00:00Z","sponsored":null},{"title":"The Biggest Business Financing Myths Out There","canonical":"https://www.business.com/articles/small-business-loan-myths/","slug":"small-business-loan-myths","thumbnail":"https://www.business.com/images/content/5c0/005877b43740b578b456a/1500-0-","dek":"Don't believe these common myths about business loans.","lastModified":"2018-11-29T12:30:00Z","published":"2018-11-29T12:30:00Z","sponsored":false},{"title":"Why Bank Loans Are Impossible to Come By","canonical":"https://staging.business.com/articles/why-bank-loans-are-impossible-to-come-by/","slug":"why-bank-loans-are-impossible-to-come-by","thumbnail":"https://staging.business.com/images/content/54f/08ba62f87b1040d8b4568/1500-0-","dek":"Can't get a bank loan approved for your business? You're not alone. Find out why bank loans are so elusive and what you can do about it.","lastModified":"2015-02-27T16:00:00Z","published":"2015-02-27T16:00:00Z","sponsored":null},{"title":"Small Business Loans for Startups and New Businesses From $50,000 to $100,000","canonical":"https://www.business.com/articles/business-loans-50-000-to-100-000/","slug":"business-loans-50-000-to-100-000","thumbnail":"https://www.business.com/images/content/5d0/1b1559c658a2c0c8b4587/1500-0-","dek":"Small, short-term loans are ideal for startups and small businesses that need some capital but don't want to be saddled with a lot of debt.","lastModified":"2020-02-18T13:34:00Z","published":"2018-05-28T15:23:00Z","sponsored":false}],"relatedReviews":[{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5e46e2fc5a215eab4d8b457c/taxes_pano_Prostock-Studio_getty.jpg","canonical":"https://staging.business.com/categories/best-tax-debt-relief-services/","title":"The Best Tax Debt Relief Services of 2021","dek":"Looking for the best tax debt relief service? We have easy-to-read, unbiased expert reviews and feature comparisons of the best and cheapest services.","slug":"best-tax-debt-relief-services","lastModified":"2021-03-23T20:42:00Z"},{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5dfbca819c658adc118b4568/Payroll_AndreyPopov_Getty.jpg","canonical":"https://staging.business.com/categories/online-payroll-services/","title":"The Best Online Payroll Services of 2021","dek":"Our team has compared the best online payroll services for 2021. See up-to-date reviews and costs for the top services.","slug":"online-payroll-services","lastModified":"2021-03-19T20:05:00Z"},{"doc_type":"category","thumbnail":"https://staging.business.com/images/rz/5df3d8695a215e58428b4570/POS_GETTY_DERO2084.jpg","canonical":"https://staging.business.com/categories/best-pos-systems/","title":"The Best POS Systems of 2021","dek":"Before you choose a POS system, check out our reviews of the best picks for 2021. ","slug":"best-pos-systems","lastModified":"2021-03-17T17:33:00Z"}],"relatedSponsoredArticles":null}},"pageContext":{"displayModified":"2016-02-02T19:00:00.000Z","template":"legacy","title":"Before You Sign: Can A Business Loan Help You Buy Out a Partner?","meta":{"robots":"index, follow"},"docType":"articles","slug":"can-a-business-loan-help-you-buy-out-a-partner","canonical":"https://staging.business.com/articles/can-a-business-loan-help-you-buy-out-a-partner/","skipTOC":false}},"staticQueryHashes":[]}