Over fifty percent of all privately held businesses in the United States are currently owned by Boomers that are at or near retirement age. This means that over the next decade, millions of small businesses may be put up for sale.

This presents an opportunity if you're interested in purchasing a small business However buying a successful small business isn’t likely to be cheap and most Americans don’t have the cash reserves to buy a business outright.

Thankfully, a business acquisition loan can help.

How Does a Business Acquisition Loan Work?

A business acquisition loan usually has a down payment of 10% to 30%, depending on the type of loan, lender, and business being acquired. The lender typically provides the loan amount (70% to 90% of the business value) as a lump sum, and the borrower uses the funds to close the deal and then pays interest on the money loaned until the loan is repaid.

What are the Requirements to Get a Business Acquisition Loan?

The requirements to get business acquisition funding vary depending on the type of financing, the lender, and nature of the business. Most lenders look at some of the same metrics and documents when considering acquisition funding.

Here are a few of the most important:

Business Plan

A business plan is something every small business loan borrower needs to have under their belt. It’s vital when planning a business acquisition.

To ensure success Your business plan should include the following:

• an executive summary
• company description
• market analysis, organization and management
• service or product line
• marketing and sales plan
• financial projections
• funding request

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.

Business Credit Score

Your business credit history impacts the terms small business lenders will offer you. There are several ways 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 can fall between 0 and 100. While each lender has different requirements, a business credit score of 80+ is considered low risk.

Cash Flow

While it’s possible to repay your business acquisition loan through the cash flow provided by your incoming revenue, many lenders prefer to see ample cash flow from your existing business (if you have one) to cover the monthly payments.

With this requirement, lenders protect themselves if the acquired business doesn’t immediately meet expectations.

Regardless of how well you manage the business, it’s reasonable to assume there will be challenges over the first few months following the acquisition.

Financial Disclosures

Most lenders require a set of financial disclosures so they can gain an understanding of the financial health of your business enterprises. These disclosures include documents and things like a balance sheet, profit and loss statement, business and personal credit scores, tax returns, and business bank accounts.

Borrowers sometimes need to provide collateral to secure acquisition funding, and financial statements allow lenders to evaluate the risk of loaning money and help them set loan terms.

For example, if you want to purchase a small business for $500,000, having $1,000,000 in long-term assets on your balance sheet will get you approved much faster by pledging some of your assets as collateral.

Many business owners don’t have $1,000,000 in assets. In that case, the lender will scrutinize other loan qualifications harder.

Getting approved for a business acquisition loan will also depend on the loan amount, the specifics of the business, and how quickly you need the funds.

Loan Options for Small Business Acquisition Loans

There are several routes to acquisition funding, including the following.

1. Term Loan from a Traditional Bank or Credit Union

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 or credit union, you must meet stringent requirements, provide a lot of business documentation, and demonstrate you can make the monthly payments.

The loan application process is lengthy at many financial institutions, with in-person meetings still a common requirement. You might have to wait more than a month to get funds from a traditional bank, which could be a dealbreaker depending on the business acquisition.

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 that assuming you qualify and can afford to wait, you can get fairly easy access to business acquisition financing with attractive terms.

Term loans can be used for various business expenses, including commercial real estate, working capital, equipment, inventory, and more.

2. Term Loan from an Online Lender

A term loan works similarly to term loans with traditional lenders. The term loan has predictable monthly payments, and the borrower receives loan funds upfront. term loan from an online lender works similarly to term loans with traditional lenders. The term loan has predictable monthly payments, and the borrower receives loan funds upfront.

Many small business owners are successful in getting a term loan from an online lender. It’s also easy to apply for this small business financing option. You can create your profile in less than a minute, submit your application for funding in 4 minutes, and get a quick decision.

Your exact interest rate for online funding will be determined by your time in business, annual revenue, and credit history.

3. SBA 7(a) Loan

The U.S. Small Business Administration (SBA) 7(a) loan program allows small business owners to get financing for several business needs, including an acquisition. SBA loans are administrated through an approved SBA lender and the SBA guarantees up to 85% of the loan, lowering the risk to lenders if the borrower defaults.

As a result, SBA lenders can offer borrowers below-market interest rates, making them an attractive option for business acquisitions. Additionally, SBA loans have maximum loan amount of $5 million, which means you may be able to cover all or most of your acquisition costs. With the added advantage of the most competitive rates among small business loans, SBA loans are a compelling choice for business owners. There are a few downsides with SBA loans, though. These include:

• While the loan application process is straightforward for applicants, the SBA sometimes takes months to approve an application. With a business acquisition, you may not be able to wait that long for approval, particularly if there are competing bids.
• The SBA has strict eligibility requirements, so you may or may not be able to qualify for this financing option.
• You might have to make a 10% to 20% down payment, which isn’t atypical (as mentioned earlier) but is possible to avoid with some business acquisition loans.

With SBA loans, your ability to wait for approval and meet the eligibility requirements determines whether or not this is a good option for you.

4. Equipment Financing

In some cases, equipment is the primary reason a small business owner acquires a business. For example, if you have a snow removal business and need more equipment trucks, it may be cheaper to acquire another business and take over some of your competition.

In that case, a large percentage of the purchase price may be related to the equipment, 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 also use the equipment as collateral for the loan, allowing you to preserve cash flow.

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 equipment’s value and the term of the loan usually equals the expected useful life of the equipment.

Interest rates usually range between 8% and 30% on an equipment loan. The lender, the type of equipment, and your credit will determine the interest rate. With this in mind, you should get several quotes to ensure you’re not paying a higher interest rate.

5. Seller Financing

Seller financing allows you to fund your business acquisition through the seller of the business. In many cases, you make a down payment, and the seller provides a loan for the remaining amount.

Sellers usually have to be highly motivated to offer seller financing. Maybe they don’t want to wait months for the loan to be approved and the deal to close.

The terms you get via seller financing can vary dramatically, as every deal has unique aspects. If you go this route, have a lawyer review the terms, as the seller could potentially create an unfair agreement.

The Bottom Line

Business acquisitions usually require quick decision-making and fast funding, so you don’t miss an opportunity. Then again, you want to be absolutely sure it’s the right move for you.

Many small business owners have learned that building a rapport with a loan broker before they need funding takes the guesswork out of many common questions when considering small business loans and acquisition funding.

The bottom line is you should have the best loan that meets your needs and ensures opportunities for you to reach your highest level of success.

FAQs

Are there other types of business loans that can be used for acquisition funding?

Yes, some small business owners use a combination of funding options. In addition to a term loan and other acquisition funding, you can apply for a business line of credit to use as expenses come up. The lines of credit work similarly to a business credit card where you’re given a credit limit you can borrow against.

How much of a downpayment will a business acquisition loan provider require?

Generally, you’ll need a downpayment of 10% to 30% for a lender to consider acquisition funding.

How long will it take to get a business acquisition loan?

With a traditional lender or the SBA, it will usually take a minimum of two to three months. An online loan marketplace or broker sometimes may be able to have a decision quicker.

What are the biggest risks of an acquisition?

Some buyers overpay and fail to do their due diligence in getting a valuation of the company. Some small business owners also miscalculate unforeseen expenses. For these reasons, it pays to have a business loan broker by your side every step of the way to counsel you through the process.

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