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Whether or not you’re already in business, you may want to acquire an existing company, either to expand or to get going as an entrepreneur without having to start from scratch. A loan that helps you buy a pre-existing business or franchise (or buy out partners of your current business) is called a business acquisition loan. Like any kind of funding, a business acquisition loan involves risk, even if you’re aiming to buy a company that’s already successful. But if the acquisition seems to make sense for you or your current company, financing the arrangement can speed up the process of starting your new venture. Make the best decision for your situation by learning how business acquisition loans work and what you’ll need to apply for one.
Common Uses for a Business Acquisition LoanTaking out a business acquisition loan allows a borrower to finance the purchase of an existing business. An acquisition loan can be used to obtain a standalone business, to purchase a franchise, or to buy out partners in your current business. While requirements vary by lender and situation, both new entrepreneurs and existing business owners can usually find options to apply for.
Types of Small Business Acquisition LoansThere are numerous types of business loans, many of which are well-suited to people wanting to acquire a business. If you’re wondering how to finance a business purchase you’d like to make, start by exploring your options thoroughly to see which requirements you meet and what structure makes the most sense for your needs. These four types of financing are good ones to consider when you’re looking for acquisition funding.
SBA 7(a) Business Acquisition LoanThere are a wide range of loans offered by the Small business Administration (SBA), including the SBA 7(a) loan. This small business loan is quite flexible. While the SBA 7(a) isn’t issued solely for the purpose of acquisition, the funds can be used for a business purchase. You can borrow up to $5 million, but typically you’ll need to make a 10% down payment. A personal guarantee is required if you own more than 20% of the business .In order to qualify for an SBA 7(a) loan, you also generally need good credit and enough cash flow to keep up with the loan payments. The SBA doesn't lend directly to business owners. Instead, applicants must apply with a lender that specializes in SBA loans. Each lender will have its own individual approval requirements, so you can still compare lender options, even if they’re providing the same type of loan.
Online LendersEven if you’re applying for a traditional loan, like a term loan, online business acquisition lenders often have less stringent approval criteria than more traditional bank lenders. And they may offer more options, too. Each online lender varies in terms of what, if any, length of time in business it requires from applicants, but being a startup may sometimes actually give your business a better chance of getting approved. Online lenders also have a reputation for much faster funding times. Preapproval is generally swift once you’ve submitted all of your documentation, and funds could arrive in your bank account within a few days. These conveniences may, however, come with rates that are typically higher than those for more traditional loans.
Seller FinancingThough it depends upon the specific situation of the business you want to acquire, in some cases you may be able to arrange for seller financing. Essentially, this means that you’re getting the loan from the seller and making your monthly payments to that former owner. This kind of deal might appeal to a business owner who’s retiring, for example, but still interested in a passive income stream. In cases like these, the loan terms could potentially be quite flexible since you’re making financing arrangements with an individual rather than a financial institution. You’ll likely need a large down payment (up to 50% of the purchase price) to make it more appealing to the seller to finance the rest of the deal. Then you’ll need to agree on other terms, including the interest rate and repayment period. These details are outlined in the loan promissory note, which must be drawn up by a lawyer and is legally binding.
Equipment FinancingBusinesses that rely heavily on equipment may sometimes be purchased using equipment financing. In order for this to be an option, the bulk of the business’s value should be in the equipment. A construction firm may rely on its bulldozes and other heavy machinery, for example, or an accounting firm may depend on its computer systems. Because the equipment is used as collateral, an equipment loan can help reduce the immediate cost of acquiring the business. You may also be able to avoid making a down payment, depending on the lender.
Business Acquisition Loan RequirementsApplying for a business acquisition loan typically requires more work than other types of business loans. You’ll need to provide information about both your finances and the business you want to purchase.What each lender wants can vary, but here are some general requirements and documentation you may need when you’re applying for a business acquisition loan.
Additionally, you’ll likely need to supply some details about the acquisition and the business itself, such as:
- At least a fair to good personal credit score
- Personal and business bank statements and tax returns
- Business financial statements and a business plan
- Proof of down payment and/or collateral
Tips for Getting a Business Acquisition Loan with Bad CreditSmall business acquisition loans can be difficult to get when you have bad credit. There are, however, a few things you can do to help your odds of approval. One option is to offer a large down payment along with collateral or a personal guarantee. You may find a lender willing to accept just one of these additions or you may need to extend all three in order to get approved. The risk, of course, is that you could lose your personal assets if you default on the loan, so it’s crucial to weigh that risk against the potential for return. It’s also a good idea to look for ways to improve your personal and business credit scores before applying for a loan. Make all of your payments on time each month, pay down excessive debt, and check for errors on each of your credit reports.
Compare Business Acquisition Loan OptionsSkipping the bootstrap phase and diving right into running an existing company is an attractive option for many entrepreneurs. A business acquisition loan makes this possible, whether you’re extending your existing company’s footprint, purchasing a franchise, or simply starting off your entrepreneurial career with a company that’s already gotten off the ground. Shop around and compare loan options to find acquisition financing best suits your needs.
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About the Author
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.