May 20, 2022 | Last Updated on: June 16, 2023
In this article, you’ll learn:
So, you’ve had some success in your small business and decided it’s time to buy another company… but you need financing and you aren’t sure how the process works.
A business acquisition loan allows you to buy another company.
A business acquisition loan usually has a down payment of 10-30% depending on the type of loan, lender, and nature of the business. The lender typically provides the loan amount (70-90% of the business value) as a lump sum, as the borrower typically needs all of the funds upfront to close the deal.
As with the down payment, the requirements to get a business acquisition loan depend on the type of financing, lender, and nature of the business. With that being said, most lenders look at the same metrics and documents when doing their due diligence. Here are a few of the most important ones:
A business plan is commonly viewed as something that needs to be created by the owner of a new small business. But it’s also important to create a new business plan for a business acquisition. What if the current owner already has a business plan? In this case, you may want to update the plan to reflect any changes you intend to make to the business.
You should include the following sections in your business plan: executive summary, company description, market analysis, organization and management, service or product line, marketing and sales plan, funding request (if you are seeking funding), financial projections, and appendix.
While an excellent business plan doesn’t guarantee future business success, lenders are much more comfortable providing funds if you have a well-thought-out plan.
Your business credit history impacts the terms offered to you by small business lenders. There are several ways for you to build your business credit, including applying for a business credit card, avoiding late payments, and improving your credit utilization ratio.
A business credit score is between 0 and 100. While each lender has different requirements, a business credit score of 80+ is considered low risk.
While it’s possible to repay your business acquisition loan through the cash flow provided by your business acquisition, many lenders prefer to see ample cash flow from your existing business to cover the monthly payments.
With this requirement, lenders protect themselves if the acquired business doesn’t immediately perform to expectations. Regardless of how well you manage the business, there’s a decent chance of running into problems over the first few months following the acquisition.
You might need to provide collateral to secure a business acquisition loan, and your balance sheet is a financial statement that allows lenders to quickly evaluate your long-term assets.
Say you want to purchase a small business for $500,000. By having $1,000,000 in long-term assets on your balance sheet, you’re going to have a much easier time reaching a loan agreement (if you are willing to pledge some of the assets as collateral).
There are several ways to get financing for a business acquisition. The best way for your business acquisition depends on a few factors including the loan amount, the specifics of the business, and how quickly you need the funds.
Here are 5 ways to get a business acquisition loan:
A term loan provides an entrepreneur with upfront cash, and the borrower agrees to pay back the loan amount on a predetermined schedule at a variable or fixed interest rate.
To get this type of loan from a bank for a business acquisition, you have to meet stringent requirements, providing a lot of business documentation and demonstrating that you are in a position to make the monthly payments.
The loan application process is lengthy at many financial institutions, with in-person meetings still being a common requirement. You might have to wait months to get funds from a traditional bank, which could be a dealbreaker depending on the business acquisition in question. With that in mind, it’s important to ask a bank for their average “time to cash” before proceeding with a loan application.
The good thing about a traditional bank loan is, assuming you qualify and can afford to wait, you have the opportunity to access business acquisition financing with attractive terms.
A term loan from an online lender is structured similarly to a term loan from a traditional bank, in terms of when the funds are disbursed and how the payments are scheduled and calculated.
It’s not easy to meet the requirements for a term loan from an online lender, but this type of loan is attainable for many small business owners. With Biz2Credit, for example, most customers get started with annual revenue greater than $250k, a 660+ credit score, and at least 18 months in business.
It is easy to apply for this small business financing option, though, via Biz2Credit. You can create your profile in less than a minute, submit your application for funding in 4 minutes, and get approved within 24 hours.
You can get a low-interest term loan from an online lender. With Biz2Credit, rates start at 7.99%.
The U.S. Small Business Administration (SBA) 7(a) loan program allows small business owners to get financing for a variety of needs, including assisting in the acquisition of a business. The SBA guarantees up to 85% of the loan, lowering the risk to lenders if the borrower defaults. As a result, lenders can offer borrowers below-market interest rates with SBA loans. Here’s another benefit of using an SBA loan for a business acquisition: the maximum loan amount is $5 million, so there’s a good chance you can cover a big piece of your acquisition with an SBA loan.
There are a few downsides with SBA loans, though:
With SBA loans, your ability to wait for the approval and meet the eligibility requirements determine the potential to use this small business funding option for a business acquisition.
In some cases, equipment is a big reason why a small business owner acquires a business. For example, you have a snow removal business and you want to acquire more trucks. There is a rival business that doesn’t have many clients but has a lot of valuable equipment. If you were to acquire this business, a large percentage of the purchase price may be related to the trucks, allowing you to use equipment financing to fund the acquisition.
You can use equipment financing to fund most types of business equipment, including computers, machinery, and vehicles. You can use the equipment as collateral for the loan, allowing you to preserve cash in your business bank account.
When determining your eligibility for an equipment loan, lenders review your credit score, time in business, repayment history, and cash flow. It’s possible to finance up to 100% of the value of the equipment, and the term of the loan equals the expected useful life of the equipment in many cases.
You can expect to pay an interest rate of anywhere between 8-30% on an equipment loan – which is obviously a wide range. The lender and the specifics of your situation determine the interest rate on this type of loan. With this in mind, you should get several quotes to ensure you’re not paying a higher interest rate.
As the name suggests, seller financing allows you to fund your business acquisition through the seller of the business. In many cases, you make a down payment for part of the purchase price and the seller provides a loan for the remaining amount.
The ability to get seller financing depends on the seller in question – they have to be motivated to provide this option. Here are two possible scenarios:
The terms you get via seller financing can vary dramatically, as every deal has unique aspects. You should have a lawyer review the terms, in any case, as the seller could potentially create an unfair agreement.
There are scenarios where a type of business acquisition loan is right… or wrong; it depends on your circumstances. For example, seller financing would be a great option if you couldn’t qualify for financing with any lenders and the seller offered reasonable terms. But if you had options and the seller didn’t offer attractive terms, you would likely pass on the seller financing.
Regardless of which financing option is best for your business, you want to be able to pounce on a business acquisition opportunity as quickly as possible. If you use Biz2Credit, you can get a small business loan in a short period of time – as little as a few business days.
Deepak Verma, who runs Philly Express Wash, got a loan through Biz2Credit in 24 hours when he took over the business. Verma remarked, “My case manager, Shawn, was very helpful – he was ready to work for me all weekend to get the deal done, and he came through to help make this a reality.”
Learn more about how Biz2Credit can help you with your business acquisition.
