How Much Can I Borrow to Buy a Business?

by Wally Foster; Updated September 26, 2017
A bank is one possible financing option for a new business.

If you're a potential business owner, the amount you can borrow to buy a business depends on a number of factors, including your experience, current amount of capital and the type of business you plan to purchase. While there are no rules limiting the total amount that you can borrow, hopeful business owners will find that many lenders have strict requirements.

Creditworthiness

Perhaps the most significant factor influencing how much you will be able to borrow is your creditworthiness. Potential lenders or investors will want to know the likelihood that you will repay the money they lend to you. While your business plan and industry will be of interest, creditworthiness refers more to you or your business' credit history and demonstrated ability to pay off debts. If you have a perfect credit rating and have consistently paid off loans in the past, you will likely be able to borrow more than if you have a shorter or non-existent credit history.

Guarantees

While a good credit rating and a good business plan are important, in some cases a lender will want to see a significant amount of collateral that shows you'll be able to pay off the loan even if the business is not very successful. Guarantees are legal documents signed by other people or businesses that promise to repay a lender if you don't. For example, a lender may offer $200,000 to buy a business that is selling for $500,000. But if a wealthy family member guarantees repayment of the loan, the lender may offer a $400,000 loan instead, comfortable that it will be repaid.

Banks

Banks are a common source of financing for those purchasing a business, and the amount you can borrow may in large part depend on the amount a bank is willing to lend. Banks will be looking for a strong business plan, experience in the relevant area and a reasonable planned use of the funds. You will also likely need to pledge some of the new business' assets, such as equipment and inventory, to the bank as collateral for the loan -- you may be able to borrow more money for a business that the bank feels will have more collateral to repossess, if necessary.

Other Investors

In addition to banks, those seeking to purchase a new business can seek loans from friends or family members. Collateral may be less important to friends or family members in part because the bank may have first legal priority to your collateral to support its own loan. Instead, the amount you can borrow from your friends and family may depend mostly on their available funds and their confidence in your business plan.

About the Author

Wally Foster is a business attorney and entrepreneur who has been writing professionally since 2003. He has written for magazines including "Consumers Digest" and has contributed to several books published by Hundreds of Heads. Foster holds a Bachelor of Arts in English from Williams College and a law degree from Harvard.

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