What should I weigh before taking out a loan to buy a business?
BDC says a financing structure may combine your own investment, a business loan and seller financing, and that choosing a loan is about more than the interest rate. Weigh the structure, personal guarantees, repayment terms and whether the lender will wait for the deal terms.
Getting a business loan for an existing business is a decision about debt you will carry after closing, not only about getting approved. This page lists what to weigh before you sign anything, using BDC guidance and the federal rules behind the Canada Small Business Financing Program (CSBFP). It does not tell you whether to borrow.
The structure of the whole purchase
BDC says a financing structure may combine your own investment, a business loan and seller financing. Its guidance on buying a business lists internal or outside equity, bank debt and vendor financing as sources of funds. A loan is therefore one piece. Before borrowing, decide how much capital you can put in, what equity partners could add and what terms your bank can offer, which are the points BDC says to be clear about when negotiations start.
Timing with the lender
BDC suggests meeting potential lenders and investors before approaching a business you may want to buy. It also says it does not offer prequalification and can review a financing request once you have identified a business and negotiated the main terms of the purchase, and it lists a letter of intent and an expected closing date among the details to provide. Ask each lender what it needs and when, so your offer timetable does not outrun your financing.
Guarantees and the signed terms
For a loan under the CSBF program, the Canada Small Business Financing Regulations let a lender take unsecured personal guarantees or suretyships in addition to primary security, up to a limit the regulations set. On or before the day the loan is made, the lender and borrower must also sign a document setting out the principal amount, the interest rate, the repayment terms and the payment schedule (for a line of credit, the authorized amount instead of the principal). Read those terms before closing, and ask what happens if the business earns less than you projected.
For a comparison of routes to a loan, see How do I get a loan to buy a business?.
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaIndustryBusiness Purchase or Transfer Loan
- 02Business Development Bank of CanadaGovernmentWhat are the steps to buying a business?
- 03Government of Canada (Department of Justice)GovernmentCanada Small Business Financing Regulations (SOR/99-141)
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