5 Business Acquisition Loans and How To Get Them
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It’s not every day you recognize an excellent business opportunity in the form of acquiring another business. When you come across this chance to own a profitable business or expand your company, you have to strike while the iron is hot!
But what if you don’t have the capital on hand to make it happen? That’s what business acquisition loans are for. This type of financing enables you to purchase an existing business, buy out your partners, or purchase the strategic assets you need.
We’ll cover how to get a business acquisition loan, the different types, and the requirements you’ll need to meet.
How To Get a Business Acquisition Loan
Getting a business acquisition loan isn’t much different from getting a standard business loan. There will be certain requirements you’ll need to meet around business experience and credit, but we’ll dive into each of those later.
The main difference between a business acquisition loan and any other form of business financing is that lenders evaluate you and the business you’re acquiring. To get started, you’ll fill out a loan application with a lender that specializes in these types of loans.
If you’re able to meet the qualifications for the loan, you may find financing with a down payment of at least 5%. If you find a lender requiring less than that for the equity injection, expect to see higher interest rates and shorter repayment terms to balance it out.
Most financial institutions will require a higher equity injection to secure the loan, so you’ll want to come prepared with at least 20%-30% of the total capital needed to get a business acquisition loan.
The business you’re acquiring will also need to go through a business valuation with any lender you choose. This actually helps you and the lender identify whether or not acquiring the new business is a profitable decision.
Types of Business Acquisition Loans
Several types of loans and financing can be used to acquire a new business. Choosing the right one for you will require you to analyze your reason for the loan, the capital you have on hand, and the potential profitability of the business.
SBA Loans
The most common financing option to buy a business is an SBA 7a loan because of its low rates and long repayment terms. This type of business acquisition financing is partially backed by the U.S. Small Business Administration and issued by select lenders.
These can be used for a variety of purposes including:
- Purchasing equipment, machinery, or materials
- Purchasing commercial real estate, land, and buildings
- Assisting in acquiring the operation or expansion of an existing business
The qualifications aren’t too difficult to meet on their own, but depending on the SBA lender, you’ll see varied credit score requirements. You’ll want to at least have at least two years in business, robust annual revenue, and a good credit score (at least a 690).
If you want to have your acquisition funding in hand within the next few days, this might not be the loan for you. An SBA loan takes at least 30 days to distribute funding and may even take a few months.
Term Loans
Term loans are found at banks and credit unions. These conventional bank loans aren’t done through the SBA. Use this funding option if fast funding isn’t a priority to you, but saving money on interest is.
For faster funding, some online lenders offer term loans as well but they typically have higher interest rates and fees to offset the underwriting rush.
Business loans through banks and credit unions often carry stiff requirements for acquisition financing. You’ll need a good to excellent personal credit score in most cases (usually a 700+), along with great financials and several years in business.
These small business loans are the most difficult to qualify for, but the advantages of a bank loan are plentiful. Getting a term loan through a bank or credit union won’t be quick, but the benefits include:
- Lower fixed interest rates
- Lower fee structure
- Best repayment terms
- Larger loan amounts (with an adequate downpayment)
Business Line of Credit
A business line of credit is similar to a business credit card. They’re considered revolving accounts which means that you’re assigned a credit limit and can spend up to that amount. You pay monthly interest on the balances you hold and the payments are generally flexible.
In some cases, when you reach the end of your draw period, you can convert the loan to a business term loan with fixed monthly payments. This isn’t typically used as business acquisition funding, but it can be used for that in specific circumstances.
Seller Financing
This type of business acquisition financing is sometimes overlooked as a way to buy a small business, but it’s effective and rather common. Instead of going through a bank or lender, you’d go directly to the current owner of the small business you’re planning to buy.
You’d both agree to defined loan terms and interest within a promissory note. Then you’d make monthly payments directly to the seller. The seller may still require a downpayment to secure the loan. In most cases, the funding you receive from the seller won’t cover the full price.
So you’ll be responsible for finding another loan or funding option to close the gap. Interest rates for an option like this usually range from 6%-10%.
Loans for Buying the Underlying Assets
Sometimes you don’t need the whole business, you just need the valuable equipment and assets they were using so you can bolster your own production. A funding option that works well for that is equipment financing.
If the small business you’re buying depends on heavy machinery then you may be able to qualify for this type of loan by putting forth your heavy equipment as collateral.
Pros of a Business Acquisition Loan
Get The Business, Keep Your Capital
Using acquisition financing responsibly provides several benefits for a small business. The biggest benefit is the ability to make your acquisition without exhausting working capital and paying off the purchase over time.
Instead, you provide a downpayment of about 15%-30% or even submit collateral to secure the loan.
Grow Your Revenues and Build Credit
Using a business loan to buy an existing business allows your company to grow and ideally increases your revenues as well. As a bonus, the loan also assists in building your business credit as long as the loan payments are made on time.
Cons of a Business Acquisition Loan
Choosing Between Lower Interest and Speed
If your business acquisition financing isn’t through an online lender, you’ll likely have a long wait before receiving the funding. An SBA loan takes at least 30 days, if not a few months to fulfill. Usually SBA 7a loans take 90-120 days to close when used for a business acquisition loan.
The timeframe for banks and credit unions can be just as long.
Limited Options for Credit Challenged
Small business owners without lengthy business experience or good credit scores will find it challenging to qualify for an acquisition loan program with a reasonable APR. This even affects partners who have at least a 20% stake in the company.
Unless you improve your personal and business credit scores, you’ll be subjected to high-interest options like accounts receivable financing.
Qualification Criteria for a Business Acquisition Loan
Before you apply for a business acquisition loan, you’ll want to prepare in a few areas to make the process as smooth as possible. Lenders typically analyze similar sets of criteria to determine your ability to repay the loan and how much you’ll qualify for. These criteria include:
- Personal credit score
- Annual revenues
- Cash flow
- Collateral
- Time in business
- Ability to repay
To meet the standards for each one, you’ll have to provide proof. That’s where the following documentation comes in. This isn’t an exhaustive list, but these are the common forms of documents requested during the application process.
- A solid business plan
- Financial statement for the business you’re planning to purchase
- Sales projections after purchase
- Proof of funds for down payment or proof of collateral
- Business valuation for the business in question
- A signed letter of intent and terms of sale
- Personal and business tax returns
- Business debt schedule
- Personal and business bank statements
- Contracts, ownership agreements, and licenses
FAQs
How do I qualify for a business acquisition loan?
You can qualify for a business acquisition loan by having established personal and business credit scores, having strong annual revenues, providing a downpayment or collateral, and being in business for at least two years. That will allow you to qualify for most acquisition loans.
Can I borrow money to purchase a business?
Yes! You can absolutely borrow money to purchase a business. It’s a common practice for small business owners who need to expand, buy out their partners or buy another business’s equipment.
How hard is it to get a loan to buy a business?
The level of difficulty in getting acquisition financing for a small business depends on three main factors: your business, which lender you choose, and the business you’re acquiring.
If a small business owner has bad credit, not enough time in business, or a lapse in cash flow it will be difficult to get a loan anywhere. If you have a good credit score and great finances, you’ll have less difficulty as long as you’re choosing the right lender and loan type.
Lastly, the business you’re acquiring must show profitable revenue projections. If not, you stand the chance of not getting approval from a financial institution.
How do I buy a business with no money?
Buying a business with no money will be more difficult than coming to the table with an equity injection (down payment). Instead, you may need to use collateral either from your current business or the new business to secure the loan.
You can find lenders that will allow you to finance the acquisition with no money down through equipment financing, but you’ll likely end up paying much more in interest or have more restrictive repayment terms and higher fees.
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