Buying an existing company or franchise is one of the most important means of growth of your business, especially if the business has a strong reputation, an established customer base, and a proven track record.
The benefits of business acquisition are numerous – it is faster, less expensive, and much less risky than the traditional methods of business growth realized through expanded marketing and sales efforts.
Financing the right business to acquire can be a time-consuming endeavor. Searching and finding to finance that acquisition can be even more complex.
Wondering what are the different funding options to finance a business acquisition? Well, you have landed on the right place. In this guide, we will let you know everything you need to know about business acquisition loans and how you can get one.
What is a Business Acquisition Loan?
A business acquisition loan is a commercial loan especially for purchasing an existing business or opening a new franchise. The amount of loan and rate of interest will depend on the business you’re buying and your own qualifications. Business acquisition loan amounts range from $5,000 to $5,000,000.
These loans can be a great solution to a number of different challenges. A business acquisition loan can help you:
- Purchasing an existing business that is already successful
- Grow your existing business by acquiring a competing company
- Avoid the start-up period of building a business
- Purchasing a new franchise
- Buy out an accomplices’ interest for your current business
What are the Qualification Requirements of Business Acquisition Loans?
Though qualification requirements for getting a business acquisition loan depend on the type of business loan you’re applying to, lenders usually review your personal finances, as well as finances of the businesses you already own.
Lenders will carefully examine both your personal and financial history to determine whether you’re the right candidate for a business acquisition loan. They want to see if you have the talent, resources, and connections to take the business ahead.
The following are some of the main criteria lenders consider when they evaluate your personal and business finances.
Personal Credit Score
You must have a decent credit score to get a business acquisition loan. Most lenders will work with a credit score from 650 to 690. If your credit score is more than 700, you are in a great position to qualify for the loan.
Business Credit Score
Your business credit score and history is one of the most important factors in determining your business acquisition loan eligibility.
Your business credits score is determined through five main factors:
- Payment history
- Amounts owed
- Length of credit history
- Types of credit used
- Your new credit
You need to provide three years of personal tax returns. Also, you need to provide three years of corporate tax returns on the business that you’re looking to acquire.
Business Financial Statements
You need to provide three years of financial statements for the business you’re planning to acquire such as Balance Sheet, Profit and Loss Statement, and Cash Flow Statements.
You have to provide the list of all the outstanding debt of your business
To determine a fair price for your business acquisition, your lender might ask for a formal business valuation performed by an independent valuation firm.
A lender would review your business plan to see if you have the right strategy to grow both your and acquired business.
If you’re planning to acquire a business, career experience in the industry of your desired business could be valuable.
While these above factors play an important role in getting a business acquisition loan, it’s not the only thing considered when making approval decisions. Depending on the lender, there are many different things that can affect your eligibility. So, it’s vital to discuss your requirements with your lender and determine what works best for your small business.
How to Apply for a Business Acquisition Loan?
There are many traditional banks and alternative lenders such as Funding Circle that can help you easily get a business acquisition loan. Depending on your particular situation, there are a variety of business acquisition financing options. So, whether you will be able to qualify for the loan will depend on the type of loan you’re applying to.
Documents you need before applying:
- Business Plan
- Business Tax Return
- Personal Financial and Background Statements
- Balance Sheet
- Business Debt Schedule
- Personal Tax Return
- Business License
- Bank Statement
- Business Lease Agreement
Types of Business Acquisition loans
If you’re currently planning to buy a business, here are some viable ways to get a business acquisition loan.
The SBA Loan
Many lenders prefer to provide business acquisition loans only if they’re guaranteed by the Small Business Administration (SBA). Although, there are several different kinds of SBA loans, but the most common for business acquisition is 7(a) loan. These loans are the most common type of funding option available through the Small Business Administration. The amount the small business owners can borrow is ranges from $30,000 to $5 million.
To qualify for SBA 7(a) loans, business owners must have a good credit score and business history. In most cases, borrowers will have to put collateral in order to secure financing. These loans are in demand due to their long repayment terms and competitive interest rates, making SBA 7(a) loans one of the most affordable solutions for acquiring a new business.
SBA 7(a) loans at a Glance
Loan Amount – From $30,000 to $5 million
Interest Rate – Anywhere between 5 to 10 percent
Repayment Terms – 10 years for most loans and 25 years for real estate loans
Minimum Requirements –
- More than 650 credit score
- 10% to 20% down payment
- Some Collateral
- No recent bankruptcies, foreclosures, or tax liens
Repayment Cycle – Monthly
Time to Funding – One to three months or more
- 7% guarantee fee for loans up to $150k
- 7% for loan greater than $150k
Read the complete guide to SBA Loans.
Business Term Loans
If you’re one of the millions entrepreneurs who have been searching for a simple funding option to achieve their business acquisition goals, you may consider applying for business term loans. From low interest and set payment rates to the streamed application process and higher loan limits, there are a number of reasons that term loans are a fan-favorite among business owners to buy a new business.
While the maximum loan amount a small business can get range from $25K to $500K, but the exact amount you qualify for depends on your company’s financial conditions and business needs.
The basic procedure of term loans is simple: you get a lump sum amount of money. You’re then responsible for repaying the total loan amount over the period of the term, plus interest, which might be fixed or variable.
Read the complete guide to Business Term Loans.
If you’re a young business looking to buy an existing business, a startup business loan can be the right option for you.
You can apply for one of the above small business startup loans if you’re in the business for at least 6 months,. If your business is older than 6 months then you might have more traditional business loan options available to you.
The most important factor that lenders consider while funding your startup is your personal credit score. The higher the score, the better your chances of qualifying for a startup loan.
Besides that, some lenders will also want to see if you have experience in a field related to your small business startup. You may also require to secure your loan with collateral such as a car or a house in some loan cases.
Read the complete guide to Startup Loans.
In some cases, if the majority of the purchase price for the business you’re acquiring is based on the value of equipment being transferred, equipment financing could be a great choice for your business acquisition.
Equipment financing is a type of business financing used to provide companies with the capital to purchase needed equipment. You can borrow or purchase all the latest tools and technologies or upgrade an existing one by applying for equipment financing. You can acquire everything from tables to computers, trucks, heavy machinery or virtually any other equipment for your business.
The interest rate, length of the loan, and loan amount depend on the type of equipment you need, how much it costs, and its expected lifespan. These loans do, however, come with a fixed rate of interest rates from 8% to 30% – with set term lengths, so you can expect the same payment every month.
Read the complete guide to Equipment Financing.
Get prequalified financing options from SME lenders in a simple and quick process that takes less than 2 minutes. Any business operating in the USA and Canada may qualify. No credit check and no fee is charged to provide funding quotes. Sign up with PayPie and compare offers to inject cash in the bank.
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