Business Acquisition vs. Starting from Scratch: Which Is Better?

If you want more autonomy, flexibility, and creative agency, owning a business can make a lot of sense. But if you’re new to the business world, it can be scary to dive headfirst into building your dreams. You might grapple with an age-old question: Should you buy an existing business or start your own from scratch? In this guide, we cover the pros and cons of each to help you decide. Plus, learn about getting a business loan to buy a business and other financing options.

Pros and Cons of Buying an Established Business

Buying an existing business can help you jump right into entrepreneurship or join a successful venture. Before getting a business loan to buy a business, it’s essential to review the pros and cons.

Pros:

• Built-in customer base: One of the major advantages of buying an established business is that you don’t need to start from scratch. You don’t need to do the tireless work of building a customer base from nothing. When you acquire a business, you already have a customer base and immediate sales. Though you’ll need to engage them and recruit new customers, having this as a foundation can be a huge benefit.
• Established connections: The business you acquire will likely already have staff on board, as well as vendor and contractor relationships. You don’t necessarily have to train or hire everyone yourself.
• Financing opportunities: Getting a business acquisition loan requires a lot of work. But it still may be easier to get a business loan to buy a business than to get a loan and start something from scratch. Lenders want a proven track record, a solid business plan, and strong cash flow. Small business owners acquiring a business may already have all that in place.

Cons:

• Existing issues: When you buy a business, you get the good with the bad. You may already have a customer base and revenue coming in, which is a plus. But you also inherit any pre-existing issues. For example, employee or customer dissatisfaction and outdated technology or systems. You get the baggage as well.
• Higher costs: If you’re starting a business, you can bootstrap in the beginning. That’s not the case with a business acquisition. Your upfront costs will be much higher. Luckily, you can get a business loan to buy a business and make it more manageable. But it may be a large loan amount that you still have to pay back.
• Potential risks: Buying a business has some potential risks, like an over-inflated valuation, unknown issues, poor work culture, and more. It’s crucial to do your due diligence before acquiring an existing business.

Pros and Cons of Starting from Scratch

Starting your own business from the ground up can be equally exciting and daunting. Some pros and cons to consider include:

Pros:

• Full control: Entrepreneurs who want to call all the shots can have full control and creativity when they start a business. You have the freedom to design your business and set up systems the way that you want.
• Lower costs: You’ll likely have much lower initial costs to start a business compared to buying one. You can start lean, get funds from family and friends, or take out a small loan to get started.
• Work culture: Starting something from scratch means you can create the work culture you wish existed. No navigating a toxic work culture or untangling a myriad of issues.

Cons:

• Limited resources: When you’re just starting out, you may have zero revenue or customers. You must earn every sale. If you’re bootstrapping, your financial resources may be tied up in the business.
• Time-intensive: Rome wasn’t built in a day, and neither is a successful business. Not only will you put a lot of financial resources into the business, but also a lot of time. Late nights, early mornings, weekends, and holidays. Starting a new business from scratch can be a major investment.
• Risk of failure: You’ve heard the stats on how many businesses fail within the first one to five years. Starting a business is inherently risky. You could put a lot of time and financial resources into it and end up with only hard-won lessons. Beating the statistics requires consistency, strategic investments, and a bit of luck.

Business Financing Options

Whether you do a business acquisition or start your own business, you have different financing options to consider.

Business Loan to Buy a Business

• Term loans: If you need a business loan to buy a business, term loans are a solid option. Generally, you’ll get a fixed rate, a set term, and a lump sum amount upfront. Those funds can help you buy the existing business. Your repayment is then spread out over time with predictable monthly payments.
• SBA loans: The Small Business Administration provides business owners with an array of loan options. But if you’re looking for a business loan to buy a business, your best bet is the SBA 7(a) loan. The funds from a 7(a) loan can be used for acquiring or improving real estate, as well as refinancing. Plus, the funds can go towards changes of ownership and working capital.
• Seller financing: The seller of the business you want to acquire may offer seller financing. In this case, the seller acts as the lender to help you buy their business. Interest rates and repayment terms may be outlined in a loan agreement or promissory note.

Small Business Loans to Start a Business

• Business line of credit: Startups just getting off the ground may have complex and ongoing financial needs. A business line of credit is one solution that provides maximum flexibility. Once you’re approved for a line of credit, you can access and draw funds up to your credit limit. When you start to repay your balance, your available credit goes back up. So you can continue to draw funds, repay, and access those funds again based on the terms of your agreement. Many lenders will want a minimum of one year in business, though.
• Equipment financing: If you’ve decided to start a business that requires a lot of equipment, you might not have the cash available to pay for everything up front. Equipment financing is available and may have easier requirements to meet as the equipment is collateral. Depending on your business needs, you can choose from an equipment lease or an equipment loan.

How to Get a Loan to Buy a Business or Start One from Scratch

Once you’ve made your decision, here’s how to get a business loan to buy a business or start one from scratch.

1. Choose financing option: Your decision to acquire a business or start fresh can impact what type of financing is best. Review your business needs and choose a specific financing option.
2. Research lenders: Check out three to five lenders. You may look for a traditional bank loan or options from online lenders with faster processing times. Review your eligibility, the terms and conditions, and interest rates.
3. Get supporting documentation: Lenders typically look at your personal credit score, annual revenue, and how long you’ve been in business. You may need to provide supporting documentation like tax returns and financial statements.
4. Submit application with lender: Gather your paperwork and go through the application process. Double-check for any errors and don’t leave anything blank.
5. Access funds: If you’re approved for financing, then you can access the funds to help buy your business or start a new one.

Final Thoughts

Choosing between a business acquisition and starting something new isn’t an easy task. Both come with major responsibilities and unique benefits and challenges. Consider your personal preferences, risk tolerance, and business goals when making a decision. Research each option and the industries you’re looking to break into. One option may be the clear winner based on what you’re looking for. Once you go one way or the other, you can look into financing options to make it happen.

FAQs about Getting a Business Loan to Buy a Business

If you’re thinking about acquiring a business, you have various financing options. Learn more about getting a business loan to buy a business.

Can You Get a Loan to Buy Existing Business?

You can get a business loan to buy a business. Oftentimes, this is referred to as a business acquisition loan.

What Types of Funding to Buy a Business Are Available?

You can obtain a business loan to buy a business. Funding options include term loans, SBA loans, and seller financing.

Where Do You Get a Business Loan to Buy a Business?

To get a business loan to buy a business, you can turn to financial institutions, credit unions, and online lenders. You may also look at SBA loans from the Small Business Administration.

Does a Business Acquisition Loan Require a Down Payment?

If you’re applying for a business loan to buy a business, lenders may require a down payment. Depending on the type of business acquisition loan, you may need a down payment between 10% and 30%.

When Does It Make Sense to Get Equipment Financing If You’re Buying a Business?

If you want to acquire a business, you can get a specific business loan to buy a business. But if you need to update the equipment to run the business, you can look into equipment financing with either a lease or a loan.

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