Business Acquisition Loans: How to Secure and Use This Option
Although it can be beneficial to expand your business, many companies don’t have the additional capital needed to pursue small business acquisitions. As a result, using a business acquisition loan is often an appealing funding option.
This blog post will explain what you should know about pursuing business acquisition loans. We’ll also discuss the specific businesses that can benefit from this type of loan.
What You Should Know About Business Acquisition Loans:
Before applying, you should understand what this loan option is, how it can be used, and the pros and cons. We’ll review everything you need to know about business acquisition financing in the sections below.
What is a Business Acquisition Loan?
Over time, an increasing number of businesses are acquired by other companies each year. By purchasing an existing business, the individual buying a business can benefit from a pre-existing client base and infrastructure.
As the name suggests, a business acquisition loan is used for the specific purpose of acquiring businesses. These business loans come in various forms, and some are federally supported by the Small Business Administration (SBA). However, other business lenders provide this funding type.
How Can a Business Acquisition Loan be Used?
To get approved for business acquisition financing, you must prove that you have a specific business plan that requires funding. In other words, you can’t simply apply for working capital to possibly buy an existing business in the future.
Instead, you’ll need to determine which business you hope to acquire and estimate the purchase price roughly. That way, you’ll know how much money you need to purchase the company, maintain your existing business, and afford other necessary expenses.
Still, business acquisition loans — especially those supported by the SBA — have become relatively more flexible over time. The most common types of business acquisitions include:
- Retail stores
- Existing franchises
Once you secure a seller’s letter of intent, you’ll increase your chances of getting a business acquisition loan.
What Are the Pros and Cons of a Business Acquisition Loan?
The benefits of a business acquisition loan are obvious. These loans allow businesses to expand sooner than would otherwise be possible. Furthermore, when supported by the SBA, these loans are valuable for growing businesses with limited credit history.
The most apparent downside of a business acquisition loan is that your business will need to pay interest. Usually, this type of business loan is designed to be repaid in 5 to 25 years. Interest rates hover around 10 percent, although there is a significant variation in the underwriting process depending on the lender.
How Do You Qualify for a Business Acquisition Loan?
To qualify for a business acquisition loan, you’ll first need to select a financial institution or lender.
If you’re considering an SBA loan, it’s essential to recognize that the SBA doesn’t originate term loans. Instead, it supports commercial banks that supply them and only covers a portion of the business loan amount.
To start the loan application process, you’ll need to get a letter of intent (LOI) from the company selling the business. Although it may be possible to skip this step, the process will be much more complicated.
To qualify for a business acquisition loan, it’s ideal if your business has an excellent personal credit score and business credit score. The business lender will be more likely to provide you with funding if you have a strong track record of meeting loan repayment terms and bill due dates.
It’ll also be helpful if you can deliver financial documents such as:
- Past cash flow statements
- Future cash flow projections
- Business and personal tax returns
- Other financial reports
Which Types of Businesses Should Apply for a Business Acquisition Loan?
As is the case with most business financing options, business acquisition loans aren’t the right fit for all small business owners. Here are some of the businesses that could benefit from these loans the most:
- Companies that want to buy out a local competitor
- Rapidly expanding businesses with a desire to reinvest capital
- Businesses that are interested in expanding into a new industry (thus expanding their offerings to customers)
- Companies looking to acquire financially troubled enterprises (infrastructure, distribution channels, etc.)
If your business falls into one or more of these categories, a business acquisition loan may be beneficial.
However, remember that acquiring an existing business can be a risky venture. If you acquire a less valuable company than you thought, you may struggle to repay your loan. Due to this, it is crucial to conduct a business valuation before acquiring a business. That way, you can be confident in your investment.
Due to the considerable risks, we suggest taking time to ensure that you’re making the right decision when acquiring another business. Once you’re confident in your acquisition, research your business funding options. In addition to acquisition financing, you can always apply for other types of funding after the purchase is complete.
Conclusion: Consider this Type of Small Business Loan
There are many ways that your small business can secure additional financing. However, if you need a loan to buy an existing business, you should consider applying for a business acquisition loan. Once approved, this business loan can give you access to necessary working capital that would otherwise be out of your reach.
Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2022.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.