Interested in expanding your business and buying another? A business acquisition loan can help you do that. Here’s what you need to know before you start the process.
There are many paths to becoming a business owner. While coming up with a brilliant idea and building a business around it is a popular choice, it’s just one option.
Another is buying an existing business.
Maybe your business doesn’t have the juice to grow at the rate you’d like, and you want to fix that. You can buy a company 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 come up with an idea and prefer to skip right to business ownership, buying something that’s already up and running.
If you don’t have the funds to do it, getting business acquisition financing can help.
Here’s what you need to know about these loans and the process of getting 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 want to buy 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 a couple of different types of loans you can explore, depending on your situation and needs:
- SBA loans: For many small business owners, especially those who often can’t secure traditional funding, SBA (Small Business Administration) loans can be a good option. The SBA works with lenders across the country to offer financing. Explore the 7(a) and the 504 loan programs; both are SBA business acquisition loans.
- Term loans: If you have a good credit score and financial standing, you might be a candidate for a term loan. These are usually through traditional lenders (though many online lenders now offer acquisition and business installment loans) and have more attractive payment terms and fixed rates.
- Equipment financing: If your business owns a lot of valuable equipment, you may be able to put that forward as collateral to secure a loan. In some instances, using this method helps expedite the loan process. However, if you were to default, the lender will own your equipment and take it away.
- Peer-to-peer lending: Another option is peer-to-peer lending (P2P). Here, funding is provided not through financial institutions but groups of people. If you struggle to qualify for traditional financing, it might be an option.
3 benefits of a business acquisition loan
Every type of business loan has its advantages, and acquisition loans are no different. For the right person, these loans can help make their dreams of business ownership a reality.
Here are a few 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 of them will tell you the startup phase is among the most stressful periods of their lives. A lot of blood, sweat, and tears go into getting a business off the ground. Aspiring entrepreneurs who don’t have the time or ideas to build something from the ground up can move right into ownership with an established business and focus on growth.
You might know that expanding your business is the best move for growth. But it can take longer than you want to raise the funds needed to take the next step on your own. With a business acquisition loan, you can move to that next phase within months, not years.
get more time
Many of these loans have extended terms for repayment, set up through installment plans. That means you can secure the funding you need to help your plans, but you have a longer horizon (in many cases, 10 years or longer) to pay back the loan. That can help take some of the pressure off as you can focus on growth without having a significant payment hanging over your head.
How to obtain a business acquisition loan
It shouldn’t come as a huge surprise, but getting a business purchase loan is a somewhat lengthier and more involved process compared to other types of financing.
The biggest reason for this is because lenders need to evaluate more than just you; they also need to assess the business you’re planning on buying. That makes sense when you think about it because lenders aren’t going to want to give you financing for a business that is on shaky ground or has a higher risk of failure.
If you, or the business, don’t meet those requirements set by the business acquisition lender, you’ll have a much more difficult time obtaining a loan.
With that in mind, here are the basic steps you’ll need to follow as you go through the process.
1. Evaluate your situation
Before you jump in to any 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 some combination of the following information:
- Credit stories: You’ll need to provide your personal credit history and the credit history for the business.
- Your professional business experience: Lenders usually won’t approve loans to people with little or no business history. Even if this is your first time owning a business, you’ll want to demonstrate you have the relevant experience.
- Financial documents: You’ll need an assortment of financial information, including profit and loss statements, valuations, and bank statements.
- Your business plan: Prepare a business plan that highlights your business goals and maximizes your chances of getting funding.
- Business valuations: Lenders pay a lot of attention to this number. Have a clear picture of the business’ valuation as it stands now 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, there will be different requirements. SBA loan requirements may be less stringent than those of your local bank or credit union. Depending on the loan, you might have to meet shorter payment periods or provide collateral to obtain it.
Just know that whatever the requirements may be, you will have to meet them. There is rarely any wiggle room with these types of loans.
3. Get your paperwork in order
Paperwork is essential to securing any loan, so ensure you have it set before you begin the application process. Otherwise, you could force a delay by scrambling to dig up old documents.
Here are a few of the documents you can expect your lender will request:
- Personal and business tax returns
- Personal and business bank statements
- A signed letter of intent
- Business financial statements
- Business debt schedule
- Business projections
- Legal business documents, including contracts, ownership agreements, and licenses
4. Pick the loan that fits your needs
If you’ve completed the steps above, this part is going to be a breeze. Once you take a good hard look at your finances and that of the business, get all your documents, and develop a business plan, you’ll be prepared to look for a lender that will meet your needs.
It’s never a bad idea to start with your current business banker. Since you will have to meet with your lender as part of the application process, having an established relationship can help. Plus, if you’re exploring the SBA route, many banks are approved SBA lenders.
5. Submit your application
Finally, it’s time to submit your application. Once it’s in, it’s just like 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 the quick turnaround like you might find with small-dollar microloans funding.
The answer depends on the lender. Some lenders, such as more traditional financial institutions, tend to require it as part of the loan. However, in many cases, the business you are buying can act as a form of collateral, especially if it has real estate or equipment.
Online lenders tend to have more options for unsecured loans, and some SBA loans don’t have a collateral requirement.
While every lender isn’t the same, there are a few essential requirements most will have. You’ll need to be aware of these and prepare for them as you go through the application process.
Qualifications usually include the following:
- A credit score above 600 (the higher, the better)
- strong business credit
- Collateral for the loan
- A certain number of years of business experience
- Demonstrated cash flow
- A business plan
C’est possible. You might have to explore alternative funding methods, such as P2P or online lenders. Be aware, though, that you might get hit with more unfavorable terms, so do the calculations to determine if the numbers work.
In the meantime, speak with your current banker about your credit score and see what you can do to help raise it. Even improving it by a few points might make the difference.
Ready to become a business owner?
It might be the perfect time for you, and a business acquisition loan may be able to help. Before you jump in, evaluate your finances and the business you’re interested in, and make sure you explore all of your options.