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How to Get A Business Acquisition Loan with Bad Credit

Business acquisitions can be a part of a small business's life cycle for many reasons: capturing a start-up business and its innovative product, proactively reducing competition, nabbing a key piece of real estate, or adding new core competency to complement an existing business. When a small business owner sees an opportunity to acquire an existing business in their growth strategy, they often need to secure large amounts of outside capital in the form of business acquisition financing in order to fund the investment.

When assessing your financing options, your personal credit score and business credit profile play a big role in determining your loan options. Healthy, viable companies can suffer from a bad credit rating for a number of reasons. Bad credit can hurt small business owners when they are looking to secure funding to fuel the growth of their venture. A poor business credit profile can result in financing refusals or unaffordable interest rates. We’ve put together a guide to help small business owners understand how to leverage the target company’s credit profile and financials to help secure loans at a more reasonable rate.

First-Things-First: What is a Business Acquisition Loan?

Acquiring another business usually requires a large amount of upfront capital. Businesses that people are looking to acquire often have sought after core competencies, good cash flow, a dominant market position, an innovative product, or any number of other excellent qualities. These characteristics make these businesses expensive.

Business acquisition loans are a financing option used by business owners to secure the necessary funding to acquire a target company if they can’t fund the acquisition with internal resources. They differ from other types of small business loans in that they're specifically geared towards and evaluated in the context of business acquisitions, as opposed to providing business owners with a business line of credit or working capital.

How Do Lenders Evaluate Business Acquisition Loans?

Lenders are seeking to minimize their risk when evaluating a possible business acquisition loan. They look at personal credit scores, the credit history of your business, the finances of both the acquirer and the target company, and risk-mitigating factors like potential collateral. Creditors determine creditworthiness by evaluating your and the target company's business plan, balance sheets, tax returns, annual revenue, relevant past performance metrics, and projections for how the acquisition will affect business operations.

Lenders will also usually look into your personal credit score, FICO credit report, and personal finances. In short, good credit, minimal debt, and profitability are all strong indicators that a lender will make their money back. But you can still get a loan at a reasonable rate with a bad credit score! Getting the best rate possible involves painting the strongest overall picture throughout the loan application process.

You need to convince a financial institution that giving you business financing for acquisition has minimal risk. If you have a poor credit history you don't have to settle for a business credit card or no option. Poor credit doesn't have to be the nail in the coffin. Your business credit score and your personal credit history are only one part of a lender's evaluation.

How to Get a Business Acquisition Loan with Bad Credit. It Starts with the Application Process

Painting a strong overall picture includes both the details of you and your business and the details of the target company. Knowing how to use the strengths of both is essential to developing the best loan application possible. In order to mitigate the perceived risk of poor personal credit score or business credit history, you can leverage the performance and credit profile of the target company.

Lenders are looking for strong cash flow, profitability, and optimal levels of debt. Even if your business doesn’t score well on these factors, if your target company can make up for those shortcomings it can lead to a more favorable loan evaluation. Getting a business acquisition loan with bad credit and at a favorable rate is possible if you know how to submit the right information on your application. Analyze your company’s business plan, tax returns, balance sheets, bank accounts, and debt structure. Do the same with your target company during your acquisition due diligence.

With this information, develop a synthesized business plan that clearly shows that the acquisition will strengthen the business and lead to long-term positive performance. You can also make up for financial weaknesses by agreeing to pay a larger down payment or offering some form of collateral to secure the loan. This can bring down your interest rates and increase the chances of loan approval because it mitigates a lender’s risk.

What are my financing options?

Once you've worked out the details of an acquisition including working out the purchase price and collecting all the relevant information from the target company, you can start to look into your options for financing. Depending on the loan amount or the purpose of the acquisition, your funding options could include a variety of loan types.

Seller Financing

The target company’s owner will often lend money to finance an acquisition. You will usually pay a small down payment and then repay the loan amount over a period of time either in fixed monthly payments or payments based upon the combined business's future performance. This type of financing often has to be combined with other financing options, but seller financing can allow more flexibility with respect to loan terms and the process of working out these details can be easier compared to securing a bank loan. Seller financing can also lessen the importance of personal and business credit history, which can be beneficial if you have bad credit.

Bank Loan/Term Loan

Banks can be a great place to find financing for an acquisition. You can get both traditional loans and more innovative interest-only loan options in which you only pay interest payments over a certain period of time before paying off the loan principal. The applications will be a bit more stringent and it may take a while to find a lender willing to work with you. Bank loans also usually involve less flexibility when it comes to repayment terms. You can also find online lenders offering innovative financing options with short application processes. These alternative lenders often provide great options despite a bad credit profile.

Equipment Loans

If most of the purchase price of the acquisition is based upon the value of the equipment being transferred between the business entities, you might be able to get a loan in the form of equipment financing. Equipment loans are borrowed against the value of the asset (the equipment), and the asset is used as collateral which can help lower interest rates.

Small Business Administration (SBA) Loans

If all else fails, the Small Business Administration (SBA) can provide financing for acquisitions. SBA loans are government-backed and can be an excellent option for securing financing at low rates even if you have a less than ideal credit history. The SBA also offers financial counseling that can connect you with loan programs geared towards business owners with bad credit

FAQs

Can I get a business acquisition loan with bad credit?

These loans use the assets of the acquired business (inventory, equipment, etc.) as collateral. Asset-based loans are a good option for borrowers with lower credit scores or limited operating history. However, interest rates tend to be higher for these kinds of loans.

Can I get a business loan with a 500 credit score?

Business loans help you grow operations, cover payroll, spend for supplies, and handle cash flow. When you have poor or bad credit, finding a lender can be challenging, but many loan options are available with credit scores as low as 500.

What is required to get a business acquisition loan?

To qualify for an SBA loan, you'll generally need a solid annual revenue, at least two years in business, and a personal credit score of 690 or higher. However, some SBA lenders may have lower credit score requirements.

Can I get a business loan with my EIN number?

You can use an Employer Identification Number (EIN) to use for a small business loan in particular situations. If you're operating a startup with a healthy business credit score, you might be qualified to apply for loans using your EIN.

How do you finance a business acquisition?

Standard options for acquisition financing include bank loans, lines of credit, loans from private lenders, Small Business Administration (SBA) loans, debt securities, and owner financing.

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