Business Acquisition Loan: A Comprehensive Guide for Business Owners
Acquiring a business can bring a lot of excitement as well as fear in a person’s life. It can get your blood pumping and give you a lot of hope & security about the future. In most cases, you don’t purchase a functional business with the cash you have lying around in your house or your bank account. Typically, you’d need to go for a Business Acquisition Loan if you’re looking to buy a business.
Are you looking to become your own master and buy a business? Or are you looking to purchase a business to add to expand your current business? If the answer to any of these questions is yes, then this guide will be helpful for you.
In this article, we will discuss all that you need to know about Business Acquisition Loans. If you’re interested in buying a business that is up and running, this guide will help you with all that you need to know about business acquisition financing.
TABLE OF CONTENTS
- What is a Business Acquisition Loan?
- Types of Business Acquisition Loans
- Advantages of Business Acquisition Loans
- Drawbacks of Business Acquisition Loans
- Business Acquisition Loan Requirements
- Other Requirements
- How to get approval for a Business Acquisition Loan?
- How can we help you?
What is a Business Acquisition Loan?
Buying a functioning business can be an effective strategy to expand your operations. But if you don’t have enough cash to make the purchase, a business acquisition loan can help you finance the deal.
Simply put, a Business Acquisition Loan is a loan to acquire a franchise or a business that already exists.
A Business Acquisition Loan is a form of financing dedicated to buying a business. Business Acquisition Loans are different from other kinds of bank loans. Here, you will need to prove to the lender that you have enough experience to successfully run and grow the business. This shows that you will be able to pay off your loan and gives the lender more confidence.
Often, business acquisition loans also require a downpayment to show your commitment to acquiring and running the business.
Types of Business Acquisition Loans
There are several ways to finance your business acquisition. Each has its specific terms and fees connected therewith. Business Acquisition loans can come in a variety of forms depending on the lender and specific terms. Let us take a look at a few types of Business Acquisition loans.
1. Term Loans
In a conventional Term Loan, the borrower receives a lump-sum amount from the financial institution. The loan is repaid in fixed installments over a set period.
You can use Term Loans to finance all kinds of business needs including business acquisition. Long-term loans have fixed monthly payments and fixed interest rates, which allow you to plan your regular payments. You could be required to provide a 10% to 30% down payment. These loans typically must be paid back in 3 to 10 years. They often have lower interest rates than financing products with shorter repayment terms, such as short-term business loans.
2. SBA Loans
The US SBA or the United States Small Business Administration is an independent agency of the federal government. It aids, counsels, assists, and protects small businesses. It exists to help strengthen the United States’ economy by preserving free competitive enterprise.
An SBA loan is a loan that the US SBA backs. The SBA backs up to 85 percent of what the bank or financial institution is willing to lend you. This means less risk for the bank or the financial institution. It also means the lender can offer a lower interest rate and longer repayment terms.
A lot of financial institutions prefer to provide loans for business acquisitions only if they’re guaranteed by the SBA. There are various SBA-backed loans, but the most common is the 7(a) loan. It’s available in amounts of up to $5 million with terms up to 25 years.
3. SBA 7(a) Loans Qualifications and Documents Required
SBA 7(a) loans have attractive interest rates, repayment terms, and closing costs. But they also have stricter qualification requirements than other business loans. Generally, to qualify for one, you’ll need the following qualifications and requirements:
- A credit score of at least 650
- A record free of any bankruptcies in the past three years
- At least a 10% down payment
- For franchisees, a paid franchise fee before the loan funds are released
- A clean criminal history, or the ability to explain any misdemeanors on your record
- No current Federal debt
- Industry or managerial experience (to prove you’re qualified to run the business you want to buy)
You’ll also need to include the following documents with your application package:
- Agreement to purchase the business
- Letter of intent to buy the business
- Business tax returns for the past three years
- Any outstanding business debt
- Long-term business contracts
- Documentation of business assets
- Business lease agreement
- Incorporation documents and/or business license
- Business plan
4. How is an SBA 7(a) Loan Secured?
Apart from being backed by the US SBA, lenders also like to minimize their risk by requiring the borrower to offer a down payment or collateral upfront. Even if the business you are purchasing is very profitable, there is still a chance that it could fail. Due to this, your lender, in all likelihood, will still require you to put up some collateral to secure the loan. This collateral could include real estate, equipment, vehicles, accounts receivable, and other business or personal assets.
The lenders may discount the value of the collateral you pledge against the loan because many types of collateral (such as vehicles) lose value over time. Alternately, a lender might require 10 – 20% of the loan amount as down payment.
5. Equipment Financing
Sometimes you need to finance the equipment more than you need to finance the business itself.
Equipment loans are designed to finance the purchase of business assets, which could be useful if you’re buying a business based on the value of its equipment. The equipment would act as collateral on the loan. This could lower the interest rate and make payments manageable. Interest rates range between 6% and 12% depending on factors such as your terms and down payment. Borrowers typically have to make a 10% to 20% down payment. You also need good credit (above 600) to qualify for financing.
6. Startup Loans
If you are looking to acquire a franchise or a small business that hasn’t quite taken off yet, a startup loan may be a great option. These loans are designed for new entrepreneurs and business owners in the very early stages of getting their business up and running. They can be used to purchase a business. In many cases, a “startup loan” would be a 7(a) loan.
Advantages of Business Acquisition Loans
There are some inherent advantages that Business Acquisition Loans have, let us explore these:
- Finance Unsecured Portions of Business: Mostly, lenders secure loans with collateral like real estate, inventory, or equipment to minimize their financial risk. The popular US SBA 7(a) loans do not require these assets. So it’s fine if you don’t have them. You can obtain up to $25,000 with this loan without needing collateral.
- Long-term Solution: While there are short-term financing options available, there are more long-term options available like long-term loans, equipment financing, and 7(a) loans from the SBA. There are also plenty of term loans that let you decide if you’d prefer a short-term or long-term repayment schedule. SBA loans typically have maximum maturities of 10 years for equipment, 10 years for working capital or inventory loans, and 25 years for real estate.
- Quick Turnaround: Most business acquisition loans have quick turnaround times, with some online lenders offering approval in as little as 24 hours. This also gives you more flexibility. While some SBA loans can take weeks or even months to receive, there are plenty of other lenders who have fast turnaround times. You can contact us to know more about financing options for your business with fast turnaround times.
Drawbacks of Business Acquisition Loans
Just like any other business financing tool, business acquisition loans are also bound to have some drawbacks or shortcomings. Let’s take a look at a few drawbacks of business acquisition loans:
- Cash-flow and Credit Score: Any business acquisition loan that isn’t as heavily focused on the collateral will have a bigger focus on cash flow and credit score. Lenders want to be more confident in your ability to pay back the loan. They will value your cash flow and personal credit score during the loan approval process.
- Stipulations or Restrictions: Some types of business acquisition loans may have certain stipulations or restrictions. For example, the 7(a) SBA loan requires that the previous owner doesn’t maintain any stake in the business and that you’ve exhausted other financing options before pursuing the 7(a) loan. Any term loans or equipment financing may require collateral to secure it, so you will want to do your research carefully to determine what will work best for you.
Business Acquisition Loan Requirements
When you’re applying for a loan to acquire a business, the process will be a little different than applying for other types of business loans. So, before you get started, it’s important to evaluate your qualifications as a business and understand what lenders are looking for in your loan application. Here are certain requirements you need to qualify for to successfully apply for a business acquisition loan.
1. Personal Credit
You must have a decent personal credit if you want to apply for a business acquisition loan. At GConnectPro, we accept all applications with a Personal Credit score of 650 or more.
2. Signed Letter of Intent
While acquiring a business, you give the seller of the business a signed letter of intent that states the proposed terms for the acquisition. You must provide a signed letter of intent to the lender to get a term sheet for the loan. There are no exceptions to this requirement.
However, there is a simple solution. A well-crafted letter of intent should contain a clause stating that the offer is contingent on obtaining financing. This clause is common in business acquisitions and gives the buyer a reasonable time to get financing.
3. Personal Financial Statement
The personal financial statement includes all the relevant financial information about you, your business, your business partners, each owner with more than 20% equity, and each guarantor. This detailed form (Form 413) is used to determine your repayment ability and creditworthiness. You can download the form here .
4. Borrower Information Form
This form (Form 1919) is used to collect information about the principal(s), key individuals in the business, and guarantors. This also collects information about any current or past government financing. You can download the form here .
5. Business Valuation
While applying for a business acquisition loan, you’ll be asked about the valuation of the business you want to acquire. The business valuation determines how much the company is worth.
Business valuation is an important factor that lenders focus on during the approval process because it helps them assess their risk too. The higher the business valuation is, the less risky higher loan amounts become. This is because there is a much stronger chance that the lender will be paid back. Business valuation can be calculated on a market-based valuation, or an asset-based valuation, or an income-based valuation.
6. Three Years of Tax Returns and Financial Statements
As part of the application, you need to provide 3 years of personal tax returns as well as 3 years of corporate tax returns on the business that you are looking to acquire.
You must provide 3 years of financial statements for the business you plan to acquire. Most lenders ask for Profit and Loss Statements, Balance Sheets, and Cash Flow Statements.
7. Debt Schedule & Debt Service Coverage Ratio
You have to provide a debt schedule that lists all the debts or liabilities of the business as a part of the loan application.
The debt service coverage ratio is the ratio of cash that is available to service interest, debt, and lease payments. It is calculated by dividing the Net Operating Income by the Debt Service. The higher the ratio, the easier it is to obtain a loan. The business you are going to buy should have a debt service coverage ratio of 1.15 or more.
8. Management Experience
To qualify for a business acquisition loan, some or all the applicants must have substantial business experience. It is preferable if your experience is in the same industry as the business that you are trying to purchase, but it’s not always required. You have to prove to the lender that you are capable of managing the business that you plan to buy and that you are a safe risk.
SBA lenders prefer that the owners make a down payment of 10-20% of the total value of the business. This number is high but it shows the lender that you are serious and committed to the business. You can reduce your downpayment requirement by convincing the seller to extend some financing to you.
There are certain other requirements that you and your business must fulfill to qualify for a business acquisition loan. These are as follows:
- Business must be at least 2 years old,
- The business must reside somewhere in the U.S.
- Business must have generated $120k in revenue in the past 12 months
How to get approval for a Business Acquisition Loan?
Whenever you borrow money, you are asking someone to take a chance on you. For them to take a chance, you need to prove that you will be a good risk to take. This means you need to prove that you are capable of repaying that lender. You also need to prove that you’ll take good care of the money they lend you.
Since your lender doesn’t actually know you, you will need more than just your good character to prove that you are a good risk. The lender will look at credit history, your record as a business person, financial statements, and the revenue of the business you want to purchase.
In case of a business acquisition loan, the lender is looking at both you as a borrower as well as the viability of the business itself. The lender will want to ensure that the business is actually making money and that you can run it well.
You need to start gathering the necessary records as you look into business acquisition lenders. You’ll need statements and records of the business’s financial value & success. You will also need your business plan & financial projections for the business.
Your personal success matters as much as the success of the business before you take ownership. So, make sure that all your documents, records, and financial statements are in order before applying for a Business Acquisition Loan. You can also contact us if you are facing issues arranging for all the documents, we’re here to help you out!
How can we help you?
At GConnectPro, we can help you get a business acquisition loan of up to $5 million. And, we can help you receive the loan amount in a matter of 7 days. The Interest Rate lies anywhere between 6.25% to 15% and the term of the loan can be for a period of 1 to 10 years.
We are here to help businesses and individuals raise funds for all kinds of requirements. Are you looking to acquire a new business? Do you want to finance the purchase of a business with Business Acquisition Loans? If yes, then we are here for you and we will help you raise business finance quickly. Get in touch with us today to find simple solutions in fundraising and business finance.