Acquiring an existing company can help you expand your business or even launch a career as an entrepreneur without having to start from scratch. A loan that helps you buy a preexisting business or franchise (or buy out partners of your current business) is called a business acquisition loan.
Keep reading to learn top business acquisition loans for 2024, common uses for a business acquisition loan, tips for getting a business acquisition loan, and more.
What Is a Business Acquisition Loan?
A business acquisition loan is a type of small business financing that’s used to acquire a franchise or pre-existing business. Like any kind of funding, a business acquisition loan involves risk, even if you’re aiming to buy a company that’s already successful.
If the acquisition makes sense for you or your current company, financing the arrangement with a business acquisition loan 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.
Do Business Acquisition Loans Work?
With a business acquisition loan, a bank, credit union, or online lender loans money to a small business that it can use to purchase a new business, buy a franchise, or expand their current business.
The lender will have basic requirements that must be met, such as a minimum credit score, minimum annual revenue, and minimum length of time in business. The requirements will vary, so it’s always best to shop around to find the right loan and lender for your situation.
Most business acquisition loans will come with fixed interest rates and set terms, which you’ll see before signing. Make sure you can afford the monthly payment so you don’t risk defaulting on the loan. Once you receive the loan, you’ll start making payments to the lender the following month.
Common Uses for a Business Acquisition Loan
Taking out a business acquisition loan allows a borrower to finance the purchase of an existing business or expand their current one. An acquisition loan can be used to:
• Obtain a standalone business.
• Purchase a franchise.
• 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.
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4 Types of Small Business Acquisition Loans
There 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, start by exploring your options thoroughly to see which requirements you meet and what structure makes the most sense for your needs. There are four common types of business acquisition loans to consider.
1. SBA 7(a) Business Acquisition Loan
There are a wide range of loans offered by the Small business Administration (SBA), including the SBA 7(a) loan. While the SBA 7(a) isn’t issued solely for the purpose of acquisition, the funds can be used toward the purchase of a new business.
With an SBA 7(a) loan, 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’ll need a good credit score 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. These may include banks, credit unions, and certain online lenders. Each lender will have its own approval requirements, so you should still compare lender options even if they’re providing the same type of loan.
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2. Online Lenders
Online business acquisition lenders often have less stringent approval criteria than traditional bank lenders. And they may offer more funding options, too.
Online lenders have different requirements of applicants, including length of time in business, minimum credit score, and annual revenue.
Online lenders have a reputation for much faster funding times when compared to banks and credit unions. 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 seen at traditional banks.
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3. Seller Financing
Though 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.
Seller financing 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.
4. Equipment Financing
Businesses that rely heavily on equipment may sometimes rely on equipment financing to fund their purchases. 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 bulldozers 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.
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Business Acquisition Loan Requirements
Applying for a business acquisition loan typically requires more work than other types of business loans. You’ll need to provide information about your finances and the business you want to purchase.
What each lender wants can vary, but there are some general requirements and documentation you may need when you’re applying for a business acquisition loan, including:
• 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
Additionally, you’ll likely need to supply some details about the acquisition and the business itself, such as:
• A letter of intent outlining the terms of the acquisition
• Company valuation
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Tips for Getting a Business Acquisition Loan
In order to qualify for a business acquisition loan, you’ll want to make sure your business is established, your credit is in good standing, and you have decent annual revenues. While minimum credit scores and annual revenue amounts will vary by lender and type of loan, typically the better these two numbers are, the better the interest rate and terms you’ll receive.
If you’re a startup or have bad credit, it may still be possible to get a business acquisition loan. Here are two things you can do to help increase your odds of approval.
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Offer a Down Payment
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.
Build Your Credit Scores
It’s also a good idea to look for ways to build your credit score 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.
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Compare Business Acquisition Loan Options
Skipping 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.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How do you get a business acquisition loan?
There are several funding options for business acquisition loans, including SBA 7(a) loans, equipment financing, seller financing, and small business loans from online lenders. To get a business acquisition loan, first decide which type of loan would be right for your needs. Then, shop around different lenders — including banks, credit unions, and online lenders — to find the best rate and terms. Once you’ve narrowed your search, you’ll submit a full application to your lender of choice and wait for final approval.
What is an acquisition loan?
An acquisition loan allows you to borrow money in order to purchase a business that is already established. It can be used to purchase a franchise, buy out partners in your own company, expand your company’s footprint, or simply jumpstart the process of developing a business. Once you’ve taken out the loan, payments come due regularly and include principal and interest. Collateral is often required to qualify for an acquisition loan.
How much money can you borrow to buy a business?
The answer depends on the lender. SBA 7(a) loans go up to $5 million. Online lenders typically advertise their maximum loan amount on their websites, and it often goes up to $250,000. But just because a lender advertises a certain maximum loan amount doesn’t mean you’ll qualify for that much.
There are several other factors that go into the amount you may be able to borrow. Once you complete the small business loan application, the lender will review your company’s financials (among other things), paying close attention to cash flow, to determine the size of your loan offer. The lender will also want to see the financials of the business being acquired. The valuation and the sales price should match. You may not be able to qualify for the loan if the company doesn’t meet the lender’s standards.
Finally, remember that some lenders require a down payment equal to a percentage of what you’re borrowing. This means that the amount of cash you’re able to put toward a down payment can limit the amount you can afford to borrow.
Can I use an SBA loan to buy a business?
Yes, SBA loans come with flexible options that let you use the funds to buy a business. The SBA 7(a) loan has minimal restrictions on what the funds can be used for. Terms last from five to 25 years and, while interest rates depend on your application, they are generally competitive.
How do you get funding for an acquisition?
To fund a business acquisition, a business can use its own savings or company funds, it can offer bonds or equity to investors, or it can acquire a loan, such as a small business term loan, an SBA loan, or a secured business loan.
Photo credit: iStock/simonkr
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