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So you've found a business that makes sense and you want to buy it but you don’t have the money to do so. This is where a business acquisition loan comes in. It allows you to borrow money without diluting the company's ownership or using the company's cash flow to return the money and pay the interest.
Instead, the lender uses the value of the company that you want to purchase as the guarantee of the loan. Assuming the acquired company performs well and the lender agrees, they will use the future earnings of the business as a guarantee for the loan.
- Have courage: Leveraging the financial system is standard practice
- Be Bold: Being determined is one of your greatest assets
- Resilience is your best friend
5 Business Acquisition Loans and How They Work
There are several types of business acquisition loans, the right one for you will depend upon your situation and, in some cases, what you are using the money for.
1. Start-up loans
A start-up loan might be appropriate if you buy a new business and don’t have an existing business. Lenders will want to know about your experience relevant to your ability to run a business. You might be required to make a down payment on the business to show lenders you are a serious buyer.
A bank, the Small Business Administration (SBA), or other types of lenders might be a good source of funds for a start-up loan. In some cases, if the new business is a franchise, the franchise company may offer its financing. Some lenders also offer special financing to purchase a franchise. You might also wish to look into how to buy a business with no money.
2. SBA loans
The Small Business Administration does not actually provide the money: rather they guarantee the loan and a bank provides the money.
- Because of this backing, SBA loans are deemed less risky if a borrower defaults on their payments.
- Interest rates on SBA loans are often lower than on a conventional bank loan because of this guarantee.
- SBA loan application process and approval process can be lengthy.
- SBA lenders will also lend to those looking to purchase a franchise.
The SBA service can help match you with a lender who might be more applicable for the type of business acquisition loan you seek, whether to purchase a franchise, an ongoing business, equipment financing, or other related purposes.
3. Bank loans
Bank loans are a conventional type of financing for all business acquisition loans. This option can be a good route if you have the following:
- Solid credit
- Good experience
- Banking relationship with a particular bank
Here are some of the steps you will need to go through to secure a bank loan:
- A banker will review your personal and business finances carefully.
- A banker will scrutinize the business's finances you are looking to acquire.
- In the case of equipment financing, a banker will look at the economics of the acquisition for your current business.
Bank loans often carry favorable interest rates, so jumping through a few extra hoops can be worth it in some cases.
Here are some alternative routes to bank loans:
- If you and/or your business are less established, you might have better luck with a local bank or credit union than with a large national bank.
- New online lenders pop up beyond the standard brick-and-mortar bank, which might be a good fit in many cases.
4. Equipment financing
Equipment financing loans are not generally traditional business loans but can be a vital source of financing for new equipment that is part of a new or existing business. Equipment financing loans typically use the value of the equipment being financed as collateral for the loan, meaning that if you default, the lender can take the equipment and sell it to recoup some or all of what they had lent to finance the purchase.
- Some firms specialize in equipment financing, and they understand this aspect of business funding.
- Some banks will engage in this type of lending as well. In some cases, large equipment manufacturers might also have their financing arm.
- An equipment financing loan may not cover the entire costs of buying a business.
Still, an equipment financing loan can be critical in acquiring the equipment needed to start a new business or expand your existing operations.
5. Business expansion loans
Business expansion loans are loans used by an existing business to purchase the necessary commodities in order to grow their client base.
- Often this includes purchasing another business in its entirety or some of the business's assets.
- Owners of an existing business may be a good fit for a bank loan of this type from a conventional lender because you will likely have a strong personal or business credit history and/or collateral to secure the loan.
- Conventional bank lenders typically offer competitive interest rates. SBA loans may also be a good option.
Business Acquisition Loan Requirements
As with any loan, each lender will have its requirements to obtain financing:
- They may have a minimum personal credit score. Even though you may be taking out the loan via your business, the people running the business are important.
- Your business’ credit score is also important in helping the lender assess how well your company pays its bills and manages cash flow.
- The lender will want to see your business tax returns to verify the company’s income and cash flow. They may want to review your personal tax returns for similar reasons.
- They will also want to review your company’s financial statements typically. This process will include an income statement, a balance sheet, and a statement of cash flows.
- The lender will see your business banking statement to verify cash flows and cash on hand. They may ask for several statements over some time.
Business Acquisition Financing Tips
Here are some tips to consider when you prepare to go out and find a business acquisition financing option:
- Have a business plan ready - you may be seeking financing for a business expansion, either the purchase of a business to incorporate into your existing company (see how to buy an existing business for more details) or equipment financing. Either way, be prepared to show a lender that you've thought through the process, including how this new business or equipment enhances your existing operations.
- Financial statements - are important for a lender to see as they will want to understand your business' finances, and they can also see how prepared you are to handle financing costs. Will paying interest on the loan be a financial hardship for your business?
- Profit margins - are important to you as a business owner. In looking at business acquisition financing options, it's essential to look at the impact of the interest costs on your business' profit margins. Some lenders may also look at this, especially if the amount of financing you seek is significant. The lender wants to be sure that you are in a position to repay the loan, even if your business and/or the economy takes a financial hit.
- Business cash flow - is a critical metric for both business owners and lenders to consider during the process. There is perhaps no more important business metric than cash flow as a business owner. Cash flow allows you to pay your bills, make payroll, and make payments on critical supplies needed to run your business. A prospective lender will be concerned about your business cash flow as it provides the source of funds you would likely use to pay the interest and ultimately repay the loan.
How To Choose The Best Business Acquisition Lender?
The best lender for your acquisition loan will vary based on your unique needs. What type of acquisition are you trying to finance? Is the loan to purchase a new business, an existing business, or perhaps a franchise? Are you looking to finance the acquisition of new equipment for your business?
Here are some considerations in selecting the best lender for your business acquisition loan:
- The application process - how does it work? Is it concise and streamlined? Can it be done all or in part online? Are the information requirements needed for the application spelled out upfront? These are all considerations when choosing a prospective lender.
- Does the lender offer a variety of loan options or just one? Not every borrower’s requirements are the same, and a lender offering several types of business acquisition loan options can be helpful.
- The interest rate on any loan you are considering is a vital detail - this will help determine your payments on the loan and determine if a given lender’s option is affordable to you.
- Understand the qualification process - for the lender or lenders you are considering. What types of information will be required? Perhaps more importantly, will you qualify as a borrower? These questions are especially important to consider if you are not the “perfect” applicant regarding your credit or your company’s balance sheet.
In short, not every lender and every borrower are a good match. Take an honest look at your situation and decide which lenders to consider for a business acquisition loan.
One lender that you should definitely consider is Fundbox. Small businesses should take a look at Fundbox because:
- They put small businesses first. Its mission is to help small businesses grow and thrive.
- Fundbox offers several financing options, including the ability to take your money as a line of credit or term loans.
- They offer the ability to repay term loans over periods ranging from 24 to 52 weeks.
- There are no origination fees or prepayment penalties.