Documents Needed for a Business Loan to Buy a Business
Getting a business loan is a key step in buying a business, but navigating the documents needed for a business loan can be overwhelming. Different lenders, including traditional banks and alternative financing sources, request various documentation to check your qualifications. Understanding the business loan requirements and why they need it makes the application process smoother and builds trust, whether you're applying for an SBA loan or other financing options.
Personal Financial Documents
A lender will want to review your personal financial documents as part of a business loan application. The required documents give them a complete picture of your personal credit and overall financial health. For Main Street business acquisitions ($50K-$2M), lenders typically require a minimum net worth of $50K-250K and credit scores above 650. Home equity is commonly used as collateral.
- Personal Tax Returns: Lenders require three years of personal income tax returns to assess financial stability and income patterns.
- Personal Financial Statement: A summary of your assets, liabilities, income, and expenses to give lenders an overview of your financial position.
- Assets and Liabilities: Detailed list of personal assets (like real estate, vehicles, investments) and liabilities (such as loan documents and debts, including credit card debt).
- Net Worth Calculation: This metric shows the difference between total assets and liabilities to determine an entrepreneur’s overall financial health.
- Personal Bank Statements (12 months): A full year of bank statements is evaluated for income consistency, spending habits, and cash flow.
- Credit Report and Score Requirements: Financial institutions will ask for your social security number to check your personal credit score and get reports to evaluate your financial responsibility and creditworthiness. (typically, 650+ for small business acquisitions)
- Minimum Score Requirements: Many lenders set minimum credit scores; meeting them helps with loan approval and underwriting and makes it easier to qualify for better term loans, interest rates, and repayment conditions.
- Addressing Credit Issues: Provide documentation to explain and resolve any credit challenges.
- Resume or Background Information: Highlight how your professional history will make you successful at managing this new business.
- Personal Collateral Documentation: Bring proof of personal finances and assets offered as collateral. They usually need a personal guarantee to secure the loan or line of credit.
Target Business Financial Documents
For the target business you intend to acquire, business lenders will examine everything from business credit scores to loss statements to business bank statements to understand the company’s financial performance and risks. Seller's Discretionary Earnings (SDE) is essential for Main Street valuations. This includes the owner's salary, benefits, and onetime expenses. Many small businesses have informal bookkeeping - bring bank statements and tax returns if formal statements aren't available.
- Tax Returns: Bring the last three years of business tax returns to verify income history and tax compliance.
- Financial Statements: Comprehensive statements provide a full picture of the business’s financial condition and business credit report, where available.
- Income Statements: These statements show the business’s revenues, expenses, and profits.
- Balance Sheets: A snapshot of the business's assets, liabilities, and owner’s equity.
- Cash Flow Statements: A lender will want to review bank account inflows and outflows to check the liquidity and operational efficiency.
- Year-to-Date Financials: Current financial performance metrics for the year will offer an up-to-date perspective.
- Accounts Receivable/Payable Aging: Aging reports help the lender assess the business’s receivables and payables and evaluate credit and cash flow.
- Customer Concentration Analysis: Identifies reliance on key customers to highlight potential risks. (Especially important for small businesses where one client might represent a large portion of revenue.)
- Inventory Reports (if applicable): An in-stock inventory assessment indicates inventory levels and its value.
- Equipment/Asset List with Valuations: A list of business assets, all appraised to establish collateral value of equipment and assets.
- Existing Loans and Debt Schedule: Details of outstanding debts, including if there is a business line of credit, terms and payment schedules.
Forward-Looking Documents
To secure financing for a business acquisition, borrowers are asked for forward-looking documents that outline plans for managing and growing the acquired company. Focus your business plan on owner-operator considerations: your hands-on role, transition timeline with the seller (typically 30-90 days), and working capital needs (usually 10% of purchase price).
- Business Plan for Acquisition: Highlights how you will acquire, operate, and grow the business, including your personal role as an owner-operator.
- Executive Summary: High-level overview of your goals, strategies, and anticipated outcomes.
- Market Analysis: Research about the industry, market trends, competitors, and target customer base.
- Operating Plan: Detailed plan for day-to-day operations, including staffing, logistics, and other operational elements.
- Management Team: Profiles and experience of key team members who will drive the business forward.
- Financial Projections: Financial forecasts demonstrating expected business performance post-acquisition.
- Revenue Forecasts: Projected sales based on market analysis and growth plan.
- Expense Projections: Anticipated operating costs to maintain and scale the business.
- Cash Flow Projections: Estimates of cash inflows and outflows to show expected liquidity.
- Sources and Uses of Funds: A breakdown of how the loan and any additional funding will be used.
- Proposed Deal Structure: Terms and structure, including payment plans and contingencies.
- Integration Plan: Strategy for merging the acquired business with existing operations, including transition training with the current owner, if applicable.
Legal and Administrative Documents
When applying for a small business loan, lenders will also request various administrative and legal documents to make sure the business has the proper infrastructure in place.
- Purchase Agreement (or Letter of Intent): A formal agreement or letter outlining the terms of the acquisition.
- Business Licenses and Permits: Proof of all required licenses and permits for the relevant industry and location.
- Commercial Lease Agreements: Documentation of any real estate agreements.
- Contracts with Key Customers/Suppliers: Existing agreements with major customers or suppliers that influence revenue and product stability.
- Organizational Documents: Formation documents, such as articles of incorporation and the business’s legal structure.
- Insurance Documentation: Proof of business insurance coverage, including liability, property, and any industry-specific insurance policies.
- Employee Agreements/Documentation: Employment contracts, non-compete agreements, and other relevant employee-related documents.
How Lenders Evaluate Your Documents
Lenders carefully analyze every loan application for metrics that indicate a business’s financial health and ability to repay the loan. They consider the debt service coverage ratio, which shows whether the business generates enough income to cover debt payments, and the loan-to-value ratio, which compares the loan amount to the business’s appraised value.
Small business owners must be able to show they have working capital for daily operations. Red flags, like declining revenues or high debts, can lead to rejection. Other common reasons for loan rejections include insufficient cash flow, poor credit history, or an inadequate business plan. For Main Street acquisitions, lenders typically require 10-20% down payment and a minimum debt-service coverage ratio of 1.25. SBA loans under $5M are common, offering longer terms and lower down payments than conventional loans. To improve your chances of approval, get organized, highlight financial strengths, and be professional.
Preparing Your Loan Package
Applying for a loan requires time and coordination. Start by gathering all of the required documents, which can take weeks. Working with professionals, like accountants, and business brokers improves accuracy and compliance, especially for financial statements and legal agreements.
Decide whether to submit electronic or physical documents. Some lenders prefer digital submissions for easier review and record-keeping. In any case, a well-prepared, organized package makes the application process smoother and presents your business in the best possible way to potential lenders.
Visit BizBuySell’s Business Broker Directory to find a buy-side broker to help you during the process of buying a business.