Business acquisition loans are loans businesses, franchises or groups use to purchase a preexisting business from entities ready to sell.
An acquisition loan is sought out when a company wants to obtain an asset or company but doesn’t have sufficient capital to do so. This loan helps support and finance the purchase of businesses by small businesses.
You don’t have to start at square one to become an entrepreneur. Buying an existing business offers you the opportunity to work for yourself without all the challenges and risks of a startup.
Whether or not you’re already in business, you may want to buy an existing company, either to broaden or to get going as an entrepreneur without having to start from the root.
TYPES OF BUSINESSES THAT GET BUSINESS ACQUISITION LOANS
- Growing/ expanding businesses that need to add new businesses to grow faster
- Competition buyers: Most times companies decide to out-buy businesses that seem to be growing to become strong competition for them. They do this to avoid them growing strong enough to outplay them in the future. There are many companies in the world now that have tried this out and are still buying out their local competitors.
- Companies that are branching and are looking to dive into new territories/industries.
Read: What Is A PPP Loan? Overview, And How It Works
WHAT IS REQUIRED TO GET A BUSINESS ACQUISITION LOAN
It is known to you and the institution lending you money that ” you and the business to be acquired” have both existed independently before and so the lenders want to know about both you and the business you want to buy first before granting the loan.
What each lender wants can vary, however, these are various general requirements they would want to consider:
1. Good personal credit
Business acquisition loan requirements are stringent as they evaluate various factors that they could use to predict your likelihood of making your loan repayments after taking on business acquisition funding.
You must have a credit score of 650 or better and meet other standards.
You should least have a fair to a good personal credit score but in a case where you do not have up to 650 credit points, Small business acquisition loans can be difficult to get when you have bad credit.
There are, however, a few things you can do to improve your chances of approval.
One alternative is to extend a large down payment alongside your collateral or a personal guarantee. You may find a lender willing to accept a large down payment regardless of your credits.
A risk to note when getting a loan is that you could lose your assets if you default on the loan, so it’s crucial to weigh that risk against the pro and cons of the business acquisition loan.
Your business or personal credit score is majorly defined through five main factors:
- Payment record
- Amounts owed
- period of credit history
- Types of credit used
- Your new credit
2. Cash flow/ income statement
Any organization that would grant you a loan would first want to know your past investment’s successes and whether your existing business can support the debt and nullify their skepticism of your business acquisition.
Of course, no company would want to be at a loss by investing in someone whose past financial endeavors have shown that he might not be able to successfully buy and manage a business.
Since you would also be required to make a down payment, business acquisition loan granters want to be sure you can sufficiently make the down payment.
3. A terrific business plan
In a case whereby a man walks up to you and requests you lend him money without any concrete plan for the money, certainly, you would not want to lend him. The same goes for lenders.
A lender would not grant you a loan without a well-thought-out and viable plan backed up with verifiable data.
You most likely should deliver a thorough business plan for your new business describing the history of your business’s recent strategy, plans you might have to make changes or add value in the future, and a plan for upgrading to your new strategy.
You are to note plans for at least the next two years.
4. General financial Report
Several other financial information would be required from you and so you might want to check with your lender to know the kind of information required to be submitted.
However, most lenders also request your bank statements, income statements, and business and personal tax return to prove the revenue and sources for your business.
You’ll also have to provide the same information (or as much as you can) for the business you’re buying.
5. A signed letter of intent
Where Can I Get A Business Acquisition Loan?
When deciding to buy an existing business or investment, one major factor to be considered is where the funding will come from.
Where would I get the loan, what will be the term of the loan and various other questions would come to the mind of a buyer and except you already have a very huge money stash kept away, you might want to consider these 4 sources of business acquisition loans.
1. BANK LOANS
One of the first places that would come to your mind when planning to get a personal or business loan is a bank. The good news is most banks have specific provisions set aside for business acquisitions.
The bank will examine your credentials, the finances of the business you want to acquire, and information related to your targeted business purchase unlike some other sources of business acquisition loans with less stringent protocols.
You should also note this, a local community bank or credit union may be more liable to approve you than a massive, nationwide banking institution would.
The following are eight items out of the things a bank will request before granting you a business loan:
8 ITEMS YOUR BANK WILL REQUEST TO GRANT YOU A BUSINESS ACQUISITION LOAN
- A good business plan
- Collateral
- Audited financial statement
- Personal and business tax statement
- Business experience
- Credit history
- History of past and present loans and debts.
- Personal financial return.
Read: 10 Business Start-up Loans In 2022
2. SBA LOANS
Another avenue to get a business acquisition loan is through SBA loans. The SBA does not directly lend you money but rather back the organization granting you the loan.
The SBA sets approaches for loans made by its partnering lenders and micro-lending institutions and also provides assurances and safety standards for lenders, especially banks who, in turn, can lend money to fund acquisitions.
SBA does not directly lend money to business owners.
Eligibility for an SBA loan is based on what a business does to receive its income, the character of its ownership, and where the business operates.
Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding.
The lender will provide you with a full list of eligibility requirements for your loan.
3. PRIVATE LENDERS
Loans gotten from private lenders are typically non-bank loans. They are loans that are gotten from private individuals, online sources, wealthy friends or siblings, or any source that does not include a bank.
Before concluding on loans gotten from private lenders, ensure that the terms are favorable and going to be easy for you to abide by.
Each private lender has its terms and conditions and so you might have to contact the private lender to know what is required.
4. EQUIPMENT FINANCING
This financing method involves getting finance/loan to get equipment for a business. One good aspect of this loan system is that the equipment itself acts as the collateral, so you may not need to secure the loan with anything else.
However, note that equipment financing only works in cases where you need a loan to cover the costs related to buying new equipment or equipment from the existing owner.
This loan does not cover purchasing a new business. There are two notable options for equipment financing, i.e. obtaining a loan to purchase equipment or leasing equipment.
If you feel that the cost of equipment will be too expensive to pay back, you can lease the instrument instead.
Read: What Is Collateralized Loan Obligations? How it Works, Pros and Cons
REQUIREMENT FOR EQUIPMENT FINANCING
Requirements vary depending on lender and equipment type, however, most lenders grant loans to businesses at least 1 year that have up to $50,000 or more in annual revenue, and have a credit score of 650 or higher.
PROS AND CONS OF BUSINESS ACQUISITION LOAN
The question often in the mind of people is ” will it be advisable to get a business acquisition loan”, especially in instances where you are still in doubt about the future success of the business to be acquired.
The first step to being taken before undertaking a business venture or deciding to get a loan to acquire an existing business is to weigh the pros and cons and see if it would be profitable to dive into it.
PROS
- Business acquisition loans are a relief as well as long-term solution during the beginning/ startup of a business.
- It allows expansion that would have not been possible with just the company fund.
Read: What Is Softloan- How It Works, Pros And Cons
CONS
- Interest/interest rates: one obvious disadvantage of business acquisition loans is the interest that would need to be paid. In cases of large loans, the interest rates are usually large too. Interest rates stand at around 10 percent, although there is a notable amount of variation based on lenders.
- Qualification requirements: To be eligible to get a business acquisition loan is no easy feat. No lender would want to place their money in the hand of an inexperienced, unaccomplished person and so the qualification requirements are often rigorous.
- You might end up taking on too many debts, especially if you had huge debts to pay before.
FAQs( FREQUENTLY ASKED QUESTIONS) ON BUSINESS ACQUISITION LOANS
There are various factors you might want to consider before acquiring an existing business. Some of which are
1. Ensure you have a good business plan
2. You should ensure you have enough money/financing to cover the purchase as well as financing that will need to continue covering business expenses.
3. You would also need to request to see the existing business’s current financial, legal, and other important documents including pending lawsuits, tax records, bank statements, etc. You might also need to hire an accountant to review the business’s financial data.
4. It is highly advisable you hire an official team that consists of a broker, banker, accountant, and attorney.
5. Know the reason why you want to buy the business and if it will be hard to merge with your current business.
No, Your company does not necessarily have to be a well-established company to be able to get business acquisition loans. Most companies that are well grown now only had the opportunity to acquire the right businesses at the right time and very early. Lenders understand that every business starts from being a small business to being fully developed. You should however note that it might be quite difficult to get a business acquisition loan as a small company as compared to being a large company.
Yes, you must. Without a business plan, no SBA will approve or even recognize your loan request. A well-designed business plan is one of the required documents for an SBA loan application.
The SBA does not hold past convictions against a person. However, the SBA excludes any business with a principal who is on probation, parole, or similar form of supervision; or who is currently facing any charges.
SBA policies clarify that this includes a person under a deferred prosecution, conditional discharge, order of protection, or on a sex offender registry, as well as anyone “currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.”.
You might have to read further about this on the SBA site.
Of course not, Your gender had nothing to do with whether you would get a loan. Female or not, as long as you have a good credit score and history, a good business plan, the right financial documents, and several other requirements, you are good to go.
While the women might have a hard time making their place in the business world, it doesn’t limit their chances of getting loans. ( countries that do not stereotype women).
Conclusion
While getting a business acquisition loan might seem like the next thing to do, be sure that you weigh the pros and cons well, compare rates and repayment terms, and that you would be able to meet the requirements.
There are also other means to fund business acquisitions asides SBA loans, bank loans, equipment funding etc.
Some of which are getting loans from relatives, friends, and siblings, company Funds, company Equity, earnout, leveraged Buyout, etc.
Note that when buying a new business, you are to also take note of how much would be needed to run it after it has been bought.
References
- dealroom.net/
- https://www.seacoastbank.com/
- www.solomonrcali.com/
- www.businessnewsdaily.com/
- https://www.herofincorp.com/
- www.lendingtree.com/
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