What Are Business Acquisition Loans and Are They Right for You?
Although there are many businesses that could benefit from expanding their operations, a large portion of these companies simply don’t have the additional capital needed to do so. As a result, using a business acquisition loan is often an appealing option.
In this post, we’ll explain what you should know about business acquisition loans. We’ll also discuss the specific businesses that stand to benefit from these loans the most.
What is a Business Acquisition Loan?
As time has gone on, an increasing number of businesses are being acquired by other companies each year. By purchasing already existing businesses rather than simply starting new ones, the purchasing organization can benefit from a pre-existing client base and infrastructure.
Like the name suggests, a business acquisition loan is a type of commercial loan that is used for the specific purpose of acquiring businesses. These loans come in a variety of forms, and some are federally supported by the Small Business Administration (SBA).
How Can a Business Acquisition Loan be Used?
To get approved for a business acquisition loan, you’ll typically need to have a specific plan for how you’ll utilize the financing. In other words, you can’t simply apply for capital to possibly acquire an already existing business in the future — you’ll need to determine which business you hope to acquire and have a rough estimate of the cost.
Still, business acquisition loans — especially those supported by the SBA — have become considerably more flexible over time. The most common types of business acquisitions include restaurants, retail stores, and existing franchises. If you’re able to secure a seller’s letter of intent in advance, then you’ll have a greater chance of getting approved for 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 make it possible for businesses to expand sooner than would otherwise be possible. Furthermore, when supported by the SBA, these loans are exceptionally valuable for growing businesses with limited credit history.
As you would expect, the most apparent downside of a business acquisition loan is that your business will need to pay interest. Usually, these loans are designed to be repaid in 5 to 25 years. Interest rates hover around 10 percent, though there is a significant amount of variation in the underwriting process.
How Do You Qualify for a Business Acquisition Loan?
To qualify for a business acquisition loan, you’ll need to begin by choosing a specific lender to apply to. If you’re considering an SBA loan, it’s important to recognize that the SBA doesn’t actually originate loans, rather, it supports commercial banks that supply them.
The first thing you’ll need to get is a letter of intent (LOI) from the company selling the business. Although it may be possible to skip this step, doing so will make the process much more complicated.
In order to qualify for a business acquisition loan, it’s ideal if your business has a credit score over 650. It’ll also be quite helpful if you’re able to deliver past cash flow statements, future cash flow projections, tax returns, and any other financial reports that the lender may be requesting.
Which Types of Businesses Should Apply for a Business Acquisition Loan?
As is the case with most financing options, business acquisition loans make more sense for some businesses than they do for others. Here are some of the businesses that could benefit from these loans the most:
- Businesses 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.
- Businesses looking to acquire financially troubled enterprises (for infrastructure, distribution channels, etc.)
If your business currently falls into one or more of these categories, then a business acquisition loan may be right for you.
There are many ways that your business can receive additional financing. However, if you’re currently in the process of acquiring an existing business, then you may want to consider a business acquisition loan. Once approved, these loans may give you access to expansionary capital that would otherwise be out of your reach.
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