OnwardLesson 3.3
Getting pre-qualified, and why it helps
Pre-qualification is a lender's early look at you, before you have found a business.
The short version
- Pre-qualification is a lender's early look at you, before you have found a business.
- It tells you roughly how much you could borrow, and it gives you a letter you can show brokers and sellers.
- It is optional. It is not a promise to lend.
- Brokers and sellers take buyers with a letter more seriously, and often share more, sooner.
- Get one before you start reaching out, and update it if your situation changes.
What pre-qualification is
A lender reviews your credit, cash, income and experience and tells you, in writing, roughly what size of purchase they could see financing. The result is usually a short letter.
It does not review a specific business. That comes later, once you have a signed letter of intent.
What it is not
A pre-qualification letter is not a loan approval and not a commitment. The lender still has to review the business you choose, order its own valuation and approve the loan. Many things can change between the letter and closing.
It is also optional. You can find a business and apply for a loan without one.
Why it helps anyway
Brokers treat you differently. Brokers hear from many people who will never close. A letter from a lender shows you have done the work and can likely finance a purchase. Many brokers share more information, and share it sooner, with buyers who have one.
You learn your range early. It shows you whether your buy box is realistic before you spend months looking. Lesson B3.4 covers how the business itself also sets a limit.
You meet your lender early. You learn how they work and what they will need, before a deal is on the clock.
How to get one
- Choose a lender that makes business acquisition loans regularly. Lesson B2.2 covers how. An SBA loan advisor can also help you approach several at once.
- Share your personal financial statement, tax returns, bank statements and résumé.
- Describe your buy box: the type and size of business you are looking for.
- Ask for a letter you can share with brokers and sellers.
Keep it current
Letters go stale. If your cash, income or plans change, or months pass, ask for an update. A letter dated a year ago is weaker than none.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- For a lender: "What would your pre-qualification letter say, and what would still need to happen before you approve a loan?" Listen for: a clear description of what the letter covers and what it does not.
- For a lender: "What size of purchase could you see financing for me, and what would change that number?" Listen for: a range, and the factors that move it, such as your cash and the business's earnings.
- For a broker: "Does a pre-qualification letter change how you work with a buyer?" Listen for: what they share, and when.
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