Whether you’re an entrepreneur dreaming of your next business venture or an experienced businessperson planning to expand your holdings, you may need funding to help achieve your goal. This business acquisition loan guide can help you discover the steps you need to take.
What Is A Business Acquisition Loan?
A business acquisition loan is a small business loan used to finance the purchase of a franchise or existing business. The process may seem complicated, but it can be made smoother by working with a lender that understands your goals and has experience funding many types of businesses.
How Do Acquisition Loans Work?
If you intend to acquire an asset to grow your business or buy another business, you might use an acquisition loan to help with funding. Once you apply for the loan and it is approved, you must use the funds for the purpose specified during an agreed-upon time period. If you don’t, the loan will no longer be available. Furthermore, the loan does not revolve like a line of credit, so no more funds will be available once it is paid.
Types of Business Acquisition Loans
There are several types of business acquisition loans. The type of loan you choose will depend on many things, including how you plan to use the funding, the type of business you are buying or already own, what you qualify for, and the lender you are working with for the loan.
Term Loans
You can get a term loan from a range of sources, including traditional banks, online lenders, and other financial institutions like credit unions. Term loans can be hard to qualify for, but if you do, they offer some of the best loan terms and lower fees than other types of business acquisition funding. To be eligible for these favorable terms, you and your business must have a good credit score and cash flow, sufficient collateral, and supporting documents that prove it, including a business plan and income statement.
SBA Loans
With an SBA loan, part of your loan is guaranteed by the U.S. Small Business Administration, a federal agency that supports small businesses nationwide. That guarantee ensures lenders can share the risk of loaning funds to small businesses. The loan doesn’t come from the government but rather from an SBA lender approved to offer government-backed loans. But not all lenders offer SBA loans, and not all funding needs qualify. SBA loans offer lower down payments and long-term financing, which can be appealing as you expand your business. You can use SBA loans for business acquisition, working capital, franchise financing, inventory, equipment, owner-occupied real estate and more.
Startup Loans
Startup loans are tailored to entrepreneurs and small business owners starting a new business. A startup loan can help you establish your new business and pay for things like office equipment, office rental, inventory, and working capital. Some startup loans are approved quickly and are in the form of credit cards, lines of credit or a short-term lump sum. You can get an SBA startup loan, but the criteria to qualify are more difficult than those from other lenders.
Business Lines of Credit
Business lines of credit are typically used to manage working capital needs and aren’t as common for financing your business acquisition, but they can work in certain situations. For example, a line of credit may be a good fit if your funding needs might fluctuate over time. With revolving credit, you only pay interest on the money you borrow, which can be borrowed repeatedly. However, you may pay extra for that flexibility with higher interest rates. If your needs change, the line of credit can usually be converted to a different type of loan when the draw period ends, allowing for restructured payments or a more extended payment schedule.
Equipment Financing
Use equipment financing to pay for equipment needed for your business, such as machines or ovens or screen printers. Equipment financing is unique in that the funds may go directly from the lender to the equipment dealer. You can use it to cover the costs of growing your business and keep money on hand for other expenses like payroll. Favorable loan terms allow you to spread payments for necessary equipment over months or years.
Seller Financing
Seller financing is similar to other business lending options, but the seller provides the funding. Loan terms can be negotiated in the best interests of both parties. For example, the seller may want to spread income out over a period of time, and the buyer may be looking for nontraditional funding options or lower interest rates. Financing this way can appeal to both the seller of the business and the buyer, especially if the seller has a strong interest in having the business succeed.
How To Qualify For A Business Acquisition Loan
Lenders will consider several factors to see if you qualify for a business acquisition loan. Depending on the funding you want, lenders will weigh several factors differently. For example, your credit score may be more important to some lenders than the down payment or value of the collateral you can offer.
Personal Credit History
Since your personal financial circumstances have an impact on your business, your personal credit history is the main factor in whether your loan application will be accepted. For better loan terms, lenders will generally require a personal credit score above 680 on a scale of 350 to 850.
Business Credit History
If your business has an established credit history, lenders may review your business credit report. Your business credit history may be harder to quantify if you are a new business owner or have operated your small business for just a short time.
Revenue
You will be expected to provide revenue and cash flow projections that your lender finds suitable to assume the risk of funding your business acquisition. Many lenders have minimum annual revenue expectations depending on the type of funding. Your lender will work with you to determine how your revenue meets their requirements. Lenders will consider if you are a new business owner or well established in your market when studying your revenue figures.
Down Payment
To qualify for a business acquisition loan, you may be required to apply for a down payment. Some SBA loans, for example, expect business owners to contribute up to 20% down to qualify. Many lenders will work with you to find a realistic amount for a down payment you can afford at a time when start-up costs may limit your cash flow. It will depend on the type of business funding you seek and how well you qualify, considering other factors.
Collateral
Requiring collateral is standard practice by lenders. Collateral is an asset your lender accepts to secure a business loan to ensure that you will make loan payments agreed upon for a loan. If you fail to do so, the lender may seize collateral as payment. You may be able to use the asset you are purchasing with the acquisition loan as collateral. Other collateral examples include buildings, inventory, equipment, vehicles, and personal assets.
Business Plan
Your business plan can make all the difference when applying for small business loans. Your plan provides the detailed planning you need to run a successful business as well. In addition to comprehensive financial projections and funding requests, a business plan should include a company description that includes your products and services, a summary of your management team and investors, the organization’s expansion plans, and a thorough market analysis that explains your business apart from the competition.
Use Of Funds
Are you buying an office building or equipment for your business? Whatever your business purpose, you will be expected to provide a detailed explanation of how you will use the funds for your business acquisition loan. From a lender’s perspective, the use of funds is just as important as whether you qualify for a loan, how much funding you need and how long it will take to repay.
Related Experience
Your related experience is one of many factors that prospective lenders will consider. Some lenders require relevant experience to prove that the borrower can manage the business. If you are considering a business acquisition loan, lenders may request that you show valid experience before they would risk funding your venture.
