How To Choose the Best Business Acquisition Loan
- Loan Features: What are the loan terms, and how long is the loan for? What are the minimum and maximum loan amounts, and do they fit within your funding needs? What are the repayment options, and are there penalties for prepayment?
- Application process: How involved is the application, and does it involve a soft-pull or hard-pull credit score impact? Once you’re approved, how quickly will you receive funding? If you’re working on a short timeframe, you’ll need a loan that’s quickly processed and funded.
- Interest rates and fees: What are the minimum and maximum interest rates, and are they competitive with current industry interest rates? Be sure to pay attention to extra fees and penalties, like loan origination fees and prepayment penalties. You’ll need to consider how quickly you want to pay back your loan and how much cash flow you’re likely to have when deciding which interest rate options are best.
- Qualification process: Understanding the qualification process can help you to determine if you might qualify for a loan. Common requirements include a minimum credit score, annual revenue range, financial projections and business plan, and details about the business’ history.
- Customer support: When you have questions about or issues with your loan, can you easily and quickly contact a lender, especially during the application review process? Consider whether you’ll have access to a live customer service representative and what the lender’s hours are.
- Online user reviews: Consider what other customers are saying about the lender on sites like Trustpilot. Every lender will have some negative reviews, but look for warning signs like multiple customers complaining about the same issue.
- Perks and Bonuses: Consider any additional perks and advantages to choosing the lender. Do they offer advanced technology, payment flexibility, or advertising transparency
How Do Business Acquisition Loans Work?
Business acquisition loans give you the financing you need to buy an established business. Loans can vary in amount from $5,000 to $5,000,000 or more, and they help an applicant purchase a business that they wouldn’t otherwise have the money to afford. By buying an established business, a business owner can avoid the expenses and challenges that come with the startup process, and can step into running an already functional business.
Applications for business acquisition loans generally review information about both the applicant and the business to be purchased. Applicants may need to meet requirements such as a minimum credit score rating, proof of previous experience that could help them to run the business, and proof of citizenship. Lenders may have strict requirements for the minimum number of years the business has been in operation and its annual income.
Types of Business Acquisition Loans
Multiple types of loans can function as business acquisition loans.
SBA Loans
SBA loans are backed by the U.S. Small Business Administration, which reduces the risk that lenders assume by issuing the loans. SBA loans tend to make it easier for small business owners to get the funding they need for multiple purposes, including business acquisition. Some lenders do restrict how their SBA loans can be used, so it’s important to find a lender who allows those loans to be used for business acquisition.
An SBA loan can vary in size from $500 to $5.5 million, and the loans offer several advantages over other types of financing. Low down payments are common, and some loans don’t require collateral. SBA loans typically have rates and fees that are competitive, and these loans often have a wide range of repayment term options.
Startup Loans
Startup loans are designed to help cover the initial expenses that come with starting a new business. These loans can cover costs like leasing space, buying equipment, and paying for monthly expenses. Startup loans allow business owners to retain their equity in their business while still having the funding they need to be able to operate the business as it gains traction.
Since these loans are for new businesses, most startup loan applications focus heavily on the business owner’s personal credit rating, rather than on the business’ history and finances. The SBA loan program can be considered a startup loan, though there are many other options, too.
Short-Term Loans
Short-term loans are intended to help business owners cover temporary business financing needs, like the purchase of a new business. These loans have shorter repayment periods than traditional loans, often lasting just six to 18 months. These loans are typically for smaller amounts up to about $100,000 that a business owner can promptly repay.
Because short-term loans are to be repaid quickly, business owners may need to make weekly or even daily payments. The APR for short-term loans is usually higher than the APR of longer-term loans. It’s also important to ensure that the repayment schedule is practical when buying a new business, since missed payment fees can quickly add up.
Equipment Financing Loans
Equipment financing loans give business owners funding that they need to purchase equipment for their business, like an oven, furniture, medical equipment, or vehicle. This type of loan lets business owners spread the cost of an expensive equipment purchase across multiple years, while also ensuring the business has access to the equipment that it needs to operate and drive income.
Equipment loans often use the equipment that’s purchased as collateral. As a result, applicants don’t usually need to have the highest credit rating or the strongest business financial history. Business equipment loans tend to require minimal paperwork and feature fixed interest rates, which makes for predictable payments throughout the loan’s entire term.
Banks and Credit Unions
Most banks and credit unions offer small business financing options, but these loans can vary significantly in amount, term limits, and interest rate. Because federal credit unions are exempt from federal taxes, they’re often able to offer lower interest fees and loan fees, like origination fees.
Bank and credit union business loan applicant requirements can also vary. Credit unions will require that applicants are members, while banks tend to offer loans to anyone, regardless of whether they have an account at the bank. Qualifying for a loan through a bank may be more difficult than getting a loan from a credit union, so applicants need to consider which option is best for their needs.
Other Business Acquisition Financing Options
In addition to securing a business acquisition loan, it’s also possible to buy a business through seller financing. In this instance, a business owner acts like the lender, agrees to a deal with the buyer, and then allows the buyer to gradually pay back the price of the business. The buyer will pay a certain amount of the cost upfront with cash, and then, just like with a traditional loan, the buyer will need to pay back the rest of the balance with interest and over a specified term.
If a business owner wants to acquire a second business to merge it into their existing business, then it might be possible to use equity to acquire that second business. The business owner could offer owners of that second business equity in the merged business. This can be an appealing offer, since it would let those owners retain some control. Their equity could also increase if that business thrives, giving them better value than if they had accepted an initial cash offer.
Tips for Getting Business Acquisition Loans
If you’re planning to apply for business acquisition financing, these four simple steps can increase your chances of being approved.
- Write a detailed business plan. Your business plan can help you to understand how the business operates, the income opportunities available, and how much money you’ll need to run the business. That plan is also important for your funding application, and it demonstrates that you have an understanding of the business and that you’ve put the necessary research and thought into making the business a success.
- Carefully review your finances. It’s important to identify how much cash you have available to put toward the business acquisition so you can determine exactly how much you need to borrow. Take time to review the business’ finances, too. Previous business financial reports as well as financial projections can help you to determine how much income you’re likely to have. With this income information, you’ll have a better sense of the loan payment size that you can best handle.
- Improve your credit score. Most business acquisition loan applications partially depend on your credit score, and the higher your score is, the more likely you are to get a lower interest rate. If your credit score is too low, you might not be able to secure funding. Pay down existing debts and focus on making payments on time to boost your credit score.
- Compare your loan options. Spend time exploring the different loan types available, and consider applying for multiple loans so you can find the best option. Compare not only interest rates, but other factors like origination fees, loan terms, and prepayment penalties to decide which loan is right for you.
Conclusion
With a business acquisition loan, you can buy a business that’s already established and generating income. These loans allow you to avoid the expensive and time-consuming startup phase, and instead, you can enjoy the benefits of owning a business that has already proven to be successful. Business acquisition loan amounts, terms, and eligibility requirements vary, so when choosing a loan, it’s important to consider the loan amount you need and what repayment terms will work well for you.