Table of Contents

  • What Are Business Acquisition Loans?
  • Types of Business Acquisition Loans
  • How to Get Financing to Buy a Small Business
  • Applying for a Business Acquisition Loan

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Business acquisition loans can help you navigate the costly and often stressful process of buying a small business.

Although there’s no one specific loan tailored for this purpose, there are many great options available to you. Let’s go over everything you need to know to get a loan to buy a business.

What Are Business Acquisition Loans?

A business acquisition loan is any type of commercial financing taken out by a borrower to buy a small business. They can be used to buy an existing business or open a franchise. 

Acquiring a business usually involves more up-front capital than a budding entrepreneur typically has to offer, which makes the need for business acquisition financing necessary. Those looking into small business ownership often lack the financial resources. Lenders can bridge this gap. 

To do so, they must believe in the business itself and you as an owner who can build a successful business capable of paying them back. With a solid business plan and good credit history, it’s possible to get the business acquisition funding you need to become your own boss.

Types of Business Acquisition Loans

If you’re stuck wondering how to get financing to buy a small business, know that there are multiple types of business acquisition loans available.

There isn’t a standard loan to buy a business. For some, the choices might be overwhelming. Learn a little bit about each option to determine which option is best for you. 

Term Loans

Term loans are the standard loan that comes to mind when talking about business lending. They’re a great business acquisition financing option.

If you’re approved for a term loan, you’ll receive a sum of money which will be repaid over a set term length. Many small business term loans are amortized, meaning the payments are made evenly with a set interest rate

The large borrowing amounts possible with term loans make them an option for small business acquisition loans of any size. Term lengths of up to 5 or more years are attractive for those buying a small business, as they drive down monthly payment costs that allow you to put more money into your new endeavor. 

Their interest rates also are lower than most other loan options, albeit because only creditworthy borrowers are able to secure them. Term loan requirements are typically the most stringent, so they aren’t an option for everyone. You’ll need excellent credit scores and valuable assets to be approved, however.

Short Term Loans

If you can’t qualify for regular term loans, many business acquisition lenders offer short-term loans with lower requirements.

By shortening the payoff period (usually less than 2 years), lenders minimize the time a borrower has to miss payment or default on the loan. 

They still have to make their money, however. Short-term loans have higher interest rates than regular term loans, both because they’re provided to less creditworthy borrowers and lenders have to make up the difference to make it worth their risk.

SBA Loans

A popular alternative for entrepreneurs who can’t qualify for term loans are Small Business Administration (SBA) loans. Although the name suggests the SBA disburses these loans themselves, that isn’t the case.

They act as a guarantor, backing a portion of the loan in case the borrower is unable to pay it. This mitigates risk for the lender that allows access to funding for businesses that otherwise wouldn’t be able to qualify.

SBA business acquisition loans are made through the agency’s 7(a) loan program, which allows borrowers to take out up to $5 million and has term lengths ranging from 5 years-25 years depending on the usage of the loan. 

Interest rates are capped at a percentage over the current prime lending rate, which controls costs. This is a big sticking point for new entrepreneurs who need to limit their expenses. 

The SBA’s business acquisition loan requirements are strict. You must have a credit score of 680 or better and meet other criteria. When buying a small business with SBA loans, you must generally have $1 in cash or assets for every $3 of the loan. This ensures you have assets to pay the loan if your new business doesn’t get off the ground as quickly as you and the lender believe it will.

A Note on Alternative Loans

Many entrepreneurs have difficulty qualifying through banks and the SBA because of lofty requirements, making them turn to alternative lenders.

 

These business acquisition lenders—usually online resources—will have much lower requirements, opening up access to more small business owners. They give entrepreneurs opportunities to secure business acquisition loans with bad credit or no collateral, on occasion.

 

In return for taking on the risk that other lenders won’t, alternative lenders will charge higher interest rates. Their business acquisition loan rates can be double what you’d receive through the SBA, but it’s the best option for many small business owners.

Startup Loans

Although there are more options available to entrepreneurs using loans to expand or merge with other companies, choices are slim for those buying a small business for the very first time.

If the business you’re acquiring is your first endeavor, lenders won’t have much to go off of. They usually look at your current and past revenue during the underwriting process, but they don’t have that luxury for startups.

This means lenders will take a closer look at your personal finances. You’ll usually need to include personal assets as collateral and contribute a solid down payment, sometimes 20% or more. 

If you don’t have the ability to do so, it’ll be difficult to find a lender to approve a business acquisition loan for startups.

How to Get Financing to Buy a Small Business

Before applying, you must know how to get financing to buy a small business. The requirements, evaluation points and documents you need to think about will help you decide what your best option is.

Business Acquisition Loan Requirements

There are many things lenders look at during their underwriting process. Understanding common business acquisition loan requirements helps you evaluate your chances of being approved.

Personal Credit Score

Your personal credit score is important to business acquisition lenders. The loan may be to fund your business, but it’s also funding you as an owner. 

Your ability to handle your own finances gives lenders a notion of how you may handle the business funding. Your credit score, if good, can help your company’s chances at securing financing., But if the score is low, it can hurt your loan approval chances even with an otherwise great application.

Personal credit scores are especially important for startup financing. Since lenders don’t have business history to look at, they must trust you even more to pay them back.

Business Credit Score

If you currently own or have previously owned a business, lenders will take a long look at your business credit score.

This score shows your ability to handle business loans, credit cards and vendor accounts. The lower your score, the less a lender will believe you can handle paying off a loan for your new endeavor. If you still get approved for a business acquisition loan with bad credit, expect your rates to be high.

Tax Returns

Lenders also take into account your personal and business tax returns. This allows them to verify your personal income and any revenues generated by your current business.

It’s best to have up to 3 years of returns available when possible. If you haven’t filed for the current fiscal year, have detailed and up-to-date financial statements available to show this information.

Bank Statements

It’s important to show positive cash flow and savings to lenders when applying for business acquisition loans. Showing them your bank statements allows them to see both.

Financial Statements

The better view you can give lenders of your financial situation, the better. Have the following financial statements on hand when applying:

  • Balance sheet
  • Profit and loss statement
  • Cash flow statement and more

Evaluating the Business You’re Buying

When you apply for a business acquisition loan, lenders must evaluate the company you’re buying.

It’s important for them to see that their money is being used to purchase a viable business. Otherwise, it’s unlikely to be capable of generating enough money for you to pay off your loan.

Small business tip: You must secure a letter of intent from the seller before a lender will evaluate your application. This document simply shows an agreement between you and the seller to make the transaction.

Business Valuation

Your lender will need an updated and accurate business valuation to begin evaluating your application. Past, current and future performance is considered along with the assets the business in question has. This process can often be done by a third-party to maintain accuracy.

The amount of business acquisition financing you qualify for will be tied to how much the business is worth.

Financial Statements

Like your business, lenders want to see the financial health of the company you’re buying. A business that’s failing increases risk of investment. You’ll want to provide the same financial statements you did for your own business, including tax returns and bank statements.

You shouldn’t have an issue getting this information from the seller, as they’ll be just as motivated as you are to get the deal done.

Profit Margins

To pay back a business acquisition loan, your new business has to make money.

Razor-thin margins can make it difficult for a lender to forecast you making enough to make your payments. On the other hand, a business with high margins can smooth over some of their concerns.

Evaluating You as an Owner

Another variable in this transaction is whether you’re the right owner for the business. Although the success of your current business shows your ability, lenders want to be sure you can translate that success to a new venture.

Business Plan

Having a great business plan increases your likelihood of being approved for a business acquisition loan.

Proving that you know the who, what, when, where, why and how of making your new business profitable shows a desire to succeed. Having a sound strategy in place will give you the best chance of making money that you can use to repay your loan.

Be detailed and provide reasons why your plan will be successful, not reasons you hope it will be.

A strong business plan helps you secure a business acquisition loan.

Related Experience

It isn’t a requirement to have experience with the same type of business you’re acquiring, but it can help or hurt your application. A restaurant owner who wants to buy a farm to grow their own produce may sound like it makes sense, but they’re unlikely to know much about running an agriculture business.

Having worked or operated a business in the same industry can ease the minds of risk-averse lenders. Working in a similar market or location can boost your application if your experience doesn’t translate 1-1.

Value Added

Much like selling to a customer, adding a value proposition to your application can help you get a loan to buy a business.

Let your lender know how you can turn around the business you’re buying or increase its revenues if it’s already a success. This could be because of your past experiences or an opportunity you’ve found that can lead to a breakthrough.

 

Applying for a Business Acquisition Loan

When you apply to get a business acquisition loan, you must have everything in place. Because of the high loan amounts and increased volatility attached to buying a small business, it’s more difficult to be approved for than a loan for your current business.

Make sure to have all of the necessary financial statements and information for both your current and future business. Polish your business plan and go over your pitch before you reach out to a lender. 

If you’re visiting a bank for a term or SBA loan, be prepared to put your best foot forward when answering questions about your application. Failing to have all of your information or making a poor impression can drastically hurt your chances.

If you’re filling out an application through an online lending marketplace such as Fast Capital 360, the process is much quicker and easier. Through a single application, you can get your case in front of multiple lenders who can help you get a loan to buy a business.

Once you apply, be sure to quickly answer any further questions your business acquisition lender has. Once approved, you’ll be one step closer to becoming an even more successful entrepreneur.

How much can my business qualify for?

Estimate My Terms

Apply to multiple lenders with just one application.

Learn More