Business acquisition loans in Canada
Find out how to get a loan to buy a business in Canada.
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If you’re searching for business acquisition loans in Canada, you’ll need to prove to your lender that you have a solid plan in place to maintain operations and generate profits. Find out more about how to get a loan to buy a business in Canada, and learn what you’ll need to qualify.
Can I use a loan to buy a business in Canada?
You can use various types of business acquisition loans to buy a business in Canada:
| Financing | How it works | Where you can get it |
|---|---|---|
| Term loan secured by assets | Use the assets of your existing business or the business you’re going to buy, such as equipment or real estate, as collateral to secure a loan. | Banks, credit unions, online lenders |
| Cash flow loan | If you don’t have tangible assets you can use as collateral, you can get a cash flow loan. This is a loan based on your historical and forecasted cash flow and your ability to make the debt payments. | Banks, credit unions, online lenders |
| Business line of credit | Take money out of a “wallet” of funds and only pay interest on what you actually borrow. | Banks, credit unions, online lenders |
| Canada Small Business Financing Program loans (CSBFP) | These loans are 75% backed by the Canadian government so they’re easier to get due to being less risky for the bank. | Banks and credit unions |
| Home equity loans and lines of credit | Borrow against the equity in your home to get financing for your new business. | Banks, credit unions, online lenders |
| Vendor financing | Get money to buy a business in Canada directly from your seller, and repay your loan based on a portion of future sales. | Small business sellers |
You can do a combination of these loans to finance a business acquisition.
How much can I borrow to buy a business?
How much a lender is willing to offer for a business acquisition loan can vary significantly from business to business. Loan amounts depend on many factors, such as the value of the assets you’re using as collateral, your cash flow, your credit score and the financial performance of your business. Lenders will offer as little as $250,000 and as much as $35 million depending on these factors.
The loan terms of business acquisition loans in Canada also vary, but they are typically between 3 and 10 years.
How to get a loan to buy a business in Canada
- Find a business to buy. Find a business to buy in Canada and meet with the owners to discuss the business’s history, including monthly expenses and revenue.
- Develop a business plan. Use our business plan checklist to make sure you think of everything that you’ll need to run your business day-to-day.
- Create a budget. Figure out how much you’ll need to pay for employees, rent, equipment and other costs to buy a business in Canada.
- Negotiate the price. Work with the current business owner to find a price that you’re both happy with and document your agreement in writing.
- Obtain financing. Compare your loan options to find a lender that may be willing to give you a loan to buy a business in Canada at the best price.
- Buy your business. Pay for your business based on the contract and price you established with the outgoing owner.
- Start making repayments. Use your personal savings and the profit from your business to make your loan payments until your business acquisition loan is paid back in full.
Steps to take before applying for a business acquisition loan
Check these boxes before you fill out your loan application to increase your chance of getting approved for a business acquisition loan:
- Check your credit score. You’ll want to make sure your personal or business credit score is sitting at 650 or above to get the best chance of being approved.
- Compare lenders. Compare at least 3 to 4 lenders to determine what a reasonable interest rate is and what type of terms and conditions you can expect on a standard loan.
- Get all of your documents in order. Compile documents such as your business plan, budget, financial statements, employment records and other information.
- Make sure you meet eligibility requirements. Double check the criteria your lender expects you to meet as it will likely not be willing to budge on basic requirements.
What do lenders look for in a business acquisition loan applicant?
Most lenders will look at the following criteria to determine how much they want to lend you for business acquisition financing:
| Factor | What lenders look for |
|---|---|
| Basic eligibility | You’ll need to be a Canadian citizen or permanent resident who is over the age of majority in your province of residence (with valid proof of ID) to get a loan to buy a business in Canada. |
| Revenue | You’ll usually be expected to make over $100,000 per year to get financing if you own other businesses. You may be able to apply based on projected revenue for your future business if you can prove that it already generates significant profits. |
| Current debts | You’ll have to show that you have a low debt-to-revenue or -income ratio. Find this number by dividing your total monthly debt payments by your total income or revenue. A good ratio for both categories would fall below 35%. |
| Collateral | Your personal assets and future business assets can both factor into whether your lender will give you a loan to buy a business in Canada. You can use your assets to get a secured business loan which will usually give you lower interest rates. |
| Credit score | Your business or personal credit score will influence your lender’s financing decision. Your credit score will usually be expected to be over 650 if you want to qualify for a loan to buy a business in Canada. |
| Down payment | The more you can put down as a down payment, the more likely your lender will be to trust that you’ll pay back your loan. A good practice is to put a down payment of 20-30% to cover your purchase, and pay for the rest with a loan. |
| Relationship with lender | If your credit score is a bit lower, you have a better chance of being approved with a lender that you already have an established relationship with. Applying to a brand-new lender will usually require you to meet stricter eligibility criteria. |
| Personal guarantee | You may need to provide a personal guarantee to repay the money you borrow if your business defaults. This makes financing your business less risky for a lender since it has a solid guarantee that it will get its money back. |
Where to get business acquisition loans in Canada
If you’re wondering how to get a loan to buy a business in Canada, you may be able to qualify for a business acquisition loan with the following lenders:
Big Five and other banks
Banks tend to offer the largest business loans out of any provider. Many banks offer term loans between $5,000 and $1,000,000, although you may have to put up collateral such as your business equipment or real estate to qualify. Banks tend to offer competitive interest rates for business loans.
- Providers include BMO, TD Bank, RBC, CIBC, Scotiabank, BDC, Canadian Western Bank and National Bank.
Credit unions
Credit unions usually offer smaller loans that sit anywhere between $5,000 and $100,000. These loans are often more flexible than bank loans and you may be required to meet less strict eligibility criteria to qualify.
- Providers include Meridian, Servus, Vancity, connectFirst, Conexus, First West, Steinbach, Alterna Savings and Coast Capital Savings.
Online providers
Online providers typically offer financing of between $5,000 and $300,000, though you may be able to find some lenders that offer more. Larger funding amounts usually need to be backed by collateral such as business equipment or real estate. Online providers specialize in providing business loans to borrowers who are underserved by banks.
- Providers include SharpShooter, Swoop, Journey Capital, Loans Canada, and Driven.
How do I get a startup loan to buy a business in Canada?
You might have a harder time applying for a loan to buy a business in Canada if the business you want to buy has been in operation for less than a year. This is because most startups lose money as they build a customer base and cover initial costs to get established.
Your best bet is to look for lenders that specialize in providing startup funding to buy a business in Canada. You should also go into any potential deal with a solid business plan and an airtight budget to increase your chance of getting approved.
6 more ways to finance a business acquisition
You may be able to get money to buy a business in Canada in the following ways:
- Government grants. You may be able to apply for federal, provincial or municipal business grants to buy a business in Canada.
- Crowdfunding. You could set up an online campaign to source the money from the general public if the business you want to buy has a solid customer base.
- Equity investors. Use an equity funding site such as Frontfundr or Vested.ca to get investors for your project in return for a share in your company.
- Use your own savings. You’ll usually want to save up at least 20-30% of the purchase price to buy a business in Canada.
- Ask family or friends. Ask family members or friends to help you buy a business in Canada if you know the loan won’t put your relationship at risk.
- Personal loan. You can take out a personal loan for business purposes. To get approved for a personal loan, the lender will need to review your personal finances, such as your credit score and income. A personal loan can be secured or unsecured.
Bottom line
You can use business acquisition loans in Canada to buy a business from an existing owner. There are several different types of financing you can take advantage of, including business term loans and business lines of credit. If your business has a strong performance, consider a business acquisition loan from a bank or credit union. If banks or credit unions cannot approve your application, you have the option to apply with online providers.
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