If you want to purchase a business, you may need a business acquisition loan to fund it. Unfortunately, there are a dizzying array of choices available for business loans, and they can be confusing to sort through. What type of business loan is ideal for a buyer looking to fund a business purchase? What financing options do various lenders offer for commercial acquisition loans? See here what you need to know about business acquisition loans lenders.
What Is a Business Acquisition Loan?
Whether it’s a small business acquisition loan or a commercial acquisition loan for a large enterprise, the concept of the acquisition loan remains the same. Unlike other business loan types, such as working capital loans, an acquisition loan is meant for the initial purchase of a business that already exists. Purchasing a business with a successful track record is a great way to get your entrepreneurship off on the right foot, and a business acquisition loan is the first step of that process for many people.
What Can You Do With a Business Acquisition Loan?
A business acquisition loan isn’t for shopping around. You’ll need to have a business in mind when you apply for the loan to acquire it. The detail of the acquisition may vary, however. For example, you may be purchasing a business from its original owner, or you may be buying out your partner’s share of a co-owned business. Many larger companies buy smaller companies whose products or services will enhance their own core business.
Benefits of a Business Acquisition Loan
They say you have to have money to make money. That’s undoubtedly true. But with a business acquisition loan, you needn’t have the cost of acquiring your new business already sitting around in your bank account. Very few people have that kind of cash lying around. Even large companies tend to make acquisitions of a larger nature, exceeding the amount that they have. Business acquisition loans provide individual entrepreneurs and large enterprises alike the opportunity to purchase the businesses they need to stay focused on their goals.
Types of Business Acquisition Loans
Different borrowers have different needs, and lenders want to cater to as many people as possible. Therefore, there are several options for potential business owners to acquire the funds to start or expand their businesses. You’ll want to consider the various loan programs available to you carefully. Find a few lenders that match your requirements, and whose requirements you meet, and compare the terms of the loans. The business itself will be the first major purchase you make as its new owner, so you want to make sure you get a good deal, so your entrepreneurship has the best chance of succeeding.
Business Term Loans
A business term loan is perhaps the most famous type of loan. Under a business term loan, a lender will provide you with the cash you need to purchase your business and ask that you make regular payments over a certain amount of time. Term loans come in both short-term and long-term forms. So you can choose to pay back the amount as quickly as a few months or over as much time as several years. Such loans may have fixed or variable interest rates. Due to the many variables that go into term loans, it’s best to shop around at various lenders to see who can offer you the best repayment terms.
Small Business Administration Loans (SBA Loans)
The Small Business Administration doesn’t make direct loans. Instead, they have programs in place that make it less risky for participating lenders to make a loan. They do this by guaranteeing up to 85% of the loan proceeds. Because of the guarantee, it can be challenging to qualify for an SBA loan. You need to meet the requirements for the loan, but you also may need to show that you’ll have a difficult time getting the loan without help. This allows the SBA to help as many people as possible with as little risk to taxpayer dollars as possible.
Startup Loans
Startup loans aren’t a particular product of a loan but rather a classification of a loan. A startup business is one with little to no history. Often, someone purchasing a business will be doing so for the first time. Because of the lack of history, it can be more difficult to find a lender as a startup. In addition, such loans are more likely to carry higher interest rates and require better credit scores or collateral. This is especially true of traditional bank loans.
Rollover for Business Startups (ROBS)
If you have a lot of money saved up for retirement, ROBS may be a good option for you. Rollover for Business Startups (ROBS) is a way that allows would-be business owners to use their retirement funds to pay for the acquisition and initial working costs of a new business. Doing so requires the new business to be a C-corporation and for the new owner to set up a retirement plan for it. The advantage of this funding method is that there are no repayments to be made.
How to Get a Business Acquisition Loan
Before you rush out and apply for your business acquisition loan, there are a few steps you should take to ensure the process goes as smoothly as possible.
Evaluate the Business
Before you decide to make a purchase, you should be sure that the business is worth what the seller asks for. The easiest way to do this is to have a professional business valuation done. Many lenders will require this information anyhow, so it makes sense to get it done as early as possible. Getting a professional evaluation will ensure you’re getting a fair price and let lenders know how much collateral the business is worth, should they require collateral and allow the business to put used for that purpose.
Compare Several Financing Options
We’ve talked about several business acquisition loan types. You should examine each of those options and see which one fits your needs best. But you should also shop around for different lenders. This means not only searching for bank loans in your area but also credit unions and alternative lenders. By exploring all your options, you can ensure that you’re getting the right acquisition finance product for your situation.
Check the Loan Requirements
Business acquisition loan requirements will vary from lender to lender and from product to product. You can save yourself time by eliminating the financial products that you most definitely don’t qualify for. When preparing for the rest of them, the list of requirements will tell you which financial documents you need to gather. Most lenders are going to want to see your cash flow and financial statements. In addition, they may want to see an accounting of the assets you’ll be acquiring as part of the purchase.
Submit an Application
Once you’ve narrowed down your options, had the business valuation performed, and gathered all the documents you’ll need to apply for business acquisition financing, the only thing left to do is apply to the lenders on your shortlist.
