Small Business Owner’s Guide to Business Acquisition Loans
Do you want to expand your business and buy another? A business acquisition loan can help you do just that. Here’s what you need to know before you start the process.
There are many paths to becoming an entrepreneur. While coming up with a brilliant idea and building a business around it is a popular choice, it’s just an option.
Another is to buy an existing business.
Maybe your business doesn’t have the juice to grow at the rate you’d like, and you want to fix it. You can buy a business that already has the inventory, market share, or infrastructure to help you get where you want to go. Or maybe you don’t want to be clueless and prefer to go straight to business ownership, buying something that’s already up and running.
If you don’t have the funds to do so, obtaining business acquisition financing can help.
Here’s what you need to know about these loans and the process to get one.
Overview: What is a business acquisition loan?
A business acquisition loan is a loan to help you acquire another business. Simple, right?
This type of loan is used by business owners who wish to purchase an additional business or franchise. If your current business is a partnership and you want to buy them out so you are the sole owner, you can also use an acquisition loan for this purpose.
There are several types of loans you can explore, depending on your situation and needs:
- SBA Loans: For many small business owners, especially those who often cannot obtain traditional financing, SBA (Small Business Administration) loans can be a good option. The SBA works with lenders across the country to provide financing. Explore it 7(a) and the 504 ready programs; both are SBA business acquisition loans.
- Term loans: If you have a good credit rating and a good financial situation, you could be a candidate for a term loan. These are usually through traditional lenders (although many online lenders now offer purchase loans and commercial installment loans) and have more attractive payment terms and fixed rates.
- Equipment financing: If your business has a lot of valuable equipment, you may be able to offer it as collateral for a loan. In some cases, using this method can speed up the loan process. However, should you default, the lender will own your equipment and take it away.
- Loan between peers: Another option is peer-to-peer (P2P) lending. Here, the funding is not provided by financial institutions but by groups of people. If you’re struggling to qualify for traditional financing, this might be an option.
3 benefits of a business acquisition loan
Each type of business loan has its advantages, and acquisition loans are no different. For the right person, these loans can help realize their dream of becoming a business owner.
Here are some of the benefits you’ll want to consider as you continue to explore business acquisition loans.
Skip the start-up phase
Ask any business owner, and many will tell you that the start-up phase is one of the most stressful times of their life. A lot of blood, sweat and tears go into starting a business. Budding entrepreneurs who don’t have the time or ideas to build something from scratch can become established business owners and focus on growth.
You may know that expanding your business is the best way to grow. But it may take longer than you want to raise the necessary funds to take the next step on your own. With a business acquisition loan, you can move to this next phase in months, not years.
Get more time
Many of these loans have extended repayment terms established through installment plans. This means that you can obtain the financing you need to carry out your projects, but you have a longer horizon (in many cases, 10 years or more) to repay the loan. This can help take some of the pressure off because you can focus on growing without having to pay a large amount.
How to get a business acquisition loan
It shouldn’t come as a huge surprise, but getting a business purchase loan is a bit longer and more complicated than other types of financing.
The main reason for this is that lenders have to assess more than you; they should also assess the business you are considering buying. This makes sense when you think about it, because lenders won’t want to give you financing for a business that’s on shaky ground or has a higher risk of failure.
If you, or the business, do not meet the requirements set by the business acquisition lender, you will have a much harder time getting a loan.
With that in mind, here are the basic steps you will need to follow throughout the process.
1. Assess your situation
Before embarking on a business loan, you need to take a close look at your finances and the business you want to buy. Any lender you work with will generally want a combination of the following information:
- Credit history: You will need to provide your personal credit history and company credit history.
- Your work experience in business: Lenders will generally not approve loans to people with little or no business history. Even if it’s your first time owning a business, you’ll want to demonstrate that you have the relevant experience.
- Financial documents: You will need an assortment of financial information, including profit and loss statements, appraisals, and bank statements.
- Your business project: Prepare a business plan that highlights your business goals and maximizes your chances of obtaining financing.
- Company valuations: Lenders pay a lot of attention to this number. Get a clear picture of the company’s current valuation and its projected growth over the next three to five years.
2. Review the requirements
Depending on the type of loan you want and the lender you use, the requirements will be different. SBA loan requirements may be less stringent than those of your local bank or credit union. Depending on the loan, you may need to meet shorter payment terms or provide collateral to obtain it.
Just know that whatever the requirements, you will have to meet them. There is rarely any wiggle room with these types of loans.
3. Get your papers in order
Paperwork is essential to getting a loan, so make sure you have it done before you start the application process. Otherwise, you could force a deadline by scrambling to dig up old documents.
Here are some of the documents you can expect your lender to request:
- Personal and business tax returns
- Personal and business bank statements
- A signed letter of intent
- Business Financial Statements
- Corporate Debt Maturity
- Trade projections
- Legal business documents, including contracts, ownership agreements and licenses
4. Choose the loan that suits your needs
If you followed the steps above, this part will be a breeze. Once you’ve carefully reviewed your and the business’s finances, obtained all of your documents, and developed a business plan, you’ll be ready to find a lender that meets your needs.
It’s never a bad idea to start with your current investment banker. Since you will need to meet with your lender as part of the application process, having an established relationship can help. Also, if you are exploring the SBA route, many banks are SBA approved lenders.
5. Submit your application
Finally, it’s time to submit your application. Once it’s in, it’s as they say – the waiting is the hardest part. A business acquisition loan will likely take a few weeks to process. It’s not something that has a quick turnaround like you might find with small dollar microloan financing.
The answer depends on the lender. Some lenders, like more traditional financial institutions, tend to require it as part of the loan. However, in many cases, the business you are buying can serve as collateral, especially if it owns real estate or equipment.
Online lenders tend to have more options for unsecured loans, and some SBA loans don’t have a collateral requirement.
Although not every lender is the same, there are a few essential requirements that most will have. You will need to be aware of this and prepare for it throughout the application process.
Qualifications typically include the following:
- A credit score above 600 (the higher the better)
- Strong trade credit
- Guarantee for the loan
- A number of years of business experience
- Demonstrated cash flow
- A business plan
It’s possible. You may need to explore alternative financing methods, such as P2P or online lenders. Be aware, however, that you could be hit by more adverse conditions, so do the math to determine if the numbers work.
In the meantime, talk to your current banker about your credit score and see what you can do to raise it. Even improving it by a few points could make a difference.
Ready to become an entrepreneur?
Now might be the perfect time for you, and a business acquisition loan can help. Before you get started, assess your finances and the business you’re interested in, and be sure to explore all of your options.