Small Business Acquisition Loans: What You Need to Know
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If you want to purchase an established business or open a franchise instead of building a company from scratch, a business acquisition loan can help get the ball rolling. Available through traditional banks, credit unions and online lenders, business acquisition financing can provide up to $5 million with competitive rates and flexible repayment terms.
What is a business acquisition loan?
A business acquisition loan is a loan that’s used to buy an existing business, buy out a business partner, open a franchise or purchase assets from another company.
Traditional banks, credit unions and online lenders offer various small business loans that cover acquisition expenses, such as purchasing equipment, setting up an office space, transferring business ownership or opening additional brick-and-mortar retail shops.
You can also get a business acquisition loan to cover startup costs and working capital expenses while you get things up and running.
4 types of business acquisition loans
There are multiple ways to finance a business acquisition, including non-SBA business acquisition loans. Options include:
1. SBA loans
Backed by the Small Business Administration (SBA), the SBA 7(a) loan is a popular option for purchasing a business or franchise. If you meet the SBA loan requirements, you can borrow up to $5,000,000 with competitive interest rates and terms up to 25 years.
Although the SBA oversees the SBA loan program, you must apply directly through a bank or online lender offering SBA funding. You will likely need to provide a down payment of 10% to 30% when securing acquisition financing.
Note that SBA loans have an extensive approval and funding timeline — approximately 30 to 60 days or up to 90 days for commercial real estate loans. You can reduce this time to two weeks by working with an SBA-preferred lender.
SBA 7(a) variable loan interest rates
| Loan amount | Rate standard | Variable maximum allowable (with current 8.50% prime rate) |
|---|---|---|
| $0 to $50,000 | Base* + 6.5% | 15% |
| $50,001 to $250,000 | Base* + 6% | 14.5% |
| $250,001 to $350,000 | Base* + 4.5% | 13% |
| $350,000 or above | Base* + 3% | 11.5% |
*Variable interest rate 7(a) loans are pegged to the prime rate (currently at 8.5%), the LIBOR rate or the SBA optional peg rate.
2. Term loans
Traditional term loans can be another great way to fund business acquisitions and franchise purchases. Banks, credit unions and online lenders provide term loans with a lump sum upfront at fixed or variable interest rates. Borrowers with good to excellent credit scores are more likely to secure lower interest rates with more flexible repayment terms.
Short-term business loans can typically provide between $2,000 and $1.5 million or more, with repayment terms ranging from three to 24 months. If you need more breathing room with your debt repayment schedule, long-term business loans offer terms of up to 10 years.
Requirements for term loans vary by lender but typically require your business to operate for six to 24 months with around $36,000 to $480,000 in annual revenue. You may also need to provide collateral or sign a personal guarantee to reduce lender risk.
3. Startup loans
In the early stages of launching their businesses, new entrepreneurs and business owners can apply for startup business loans to help fund acquisition expenses and projects. Loan amounts typically range from $1,000 to $1.5 million or more, with repayment terms between four to 72 months.
While some traditional banks provide startup financing, you may have better luck gaining approval with an alternative lender. In general, private business lenders have more lenient eligibility requirements than other types of business financing, with options available to companies after only six months in operation.
Alternatively, SBA microloans can help startups access the funds they need to start and grow a business. However, these funds are typically capped at $50,000, which may not be enough to cover acquisition purchases.
4. Equipment financing
Equipment financing could be a great option if you need help purchasing equipment from another business owner during the acquisition process. Since the equipment acts as collateral to reduce lender risk, equipment financing is typically available to a range of business owners like startups, low-credit borrowers or those with limited revenue.
Funds can go as high as $2 million with repayment terms ranging from four to 84 months. Some equipment lenders require a 20% down payment, while others offer 100% financing. You can also explore equipment leasing if you have short-term equipment needs or are tight on cash.
Pros and cons of acquisition financing
While acquisition financing can help many business owners acquire new companies or expand with a franchise, it’s essential to weigh the pros and cons to see if it’s a good fit for your situation.
| Pros | Cons |
|---|---|
May have flexible collateral requirements.While some lenders require collateral like real estate, inventory or equipment to secure the funds, the popular SBA 7(a) loan and certain alternative lenders don’t need such assets. So, if you want to purchase intellectual property instead of physical property and can’t provide collateral or down payments, an unsecured business loan could help. Offers long-term solutions.With a wide range of business acquisition finance options available, you can pick the term that best suits your company’s budget and cash flow needs. Long-term business loans typically go up to 10 years, while SBA loans have maximum maturities of 10 years for equipment, 10 years for working capital or inventory loans and 25 years for commercial real estate. Options for fast funding.Many lenders offer quick business loans that can approve and deliver your funds within one to three business days. Although SBA loans can take weeks or even months to receive, the SBA Express Loan typically has a 36-hour turnaround time. | Qualification criteria can be strict.Lenders may focus more heavily on your credit scores and company’s cash flow when applying for a business acquisition loan, especially for non-collateral loans. Interest rates can affect your bottom line.Newer businesses and startups might end up paying higher rates since they pose a greater risk to lenders. While shopping around can help you secure a more competitive rate, you’ll want to ensure your budget can handle the interest charges. Keep in mind that you can try refinancing your business debt for better rates once your company generates a more robust cash flow. May have stipulations or restrictions.Depending on the loan type and lender, you might have to follow specific rules. For example, the SBA 7(a) loan requires that the previous owner doesn’t maintain any stake in the business and that you’ve exhausted other financing options before pursuing this option. Some term loans or equipment financing may require collateral or a down payment to secure the debt. And certain lenders limit what industries are eligible for their loans. |
4 business acquisition lenders to consider
| Lender | Type of loan | Max. loan amount | Term length | Min. credit score | Time in business | Min. annual revenue | |
|---|---|---|---|---|---|---|---|
 | SBA 7(a) | $5,000,000 | Up to 300 months | Not disclosed | Not disclosed | Not disclosed | Get business loan offers |
 | Short-term | $250,000 | Up to 24 months | 625 | 12 months | $100,000 | Get business loan offers |
 | Startup | $1,500,000 | 4 to 15 months | 500 | 6 months | $180,000 | Get business loan offers |
 | Equipment financing | $2,000,000 | 12 to 84 months | 550 | Not required | Not required | Get business loan offers |
How to get a loan to buy a business
To get a business loan, you’ll need to:
1. Evaluate the business’s worth
Requesting a business valuation can determine a company’s worth, helping lenders assess how much capital they feel is appropriate. For example, you might have difficulty convincing a lender to approve your $350,000 acquisition loan if the business you want to purchase has a value of only $15,000. In contrast, buying a business valued over $100,000 with a steady income stream could reassure lenders that you can likely handle the loan payments.
While business valuations can be calculated in different ways, here are three popular options:
- Market-based valuation: This method compares your business to similar companies in your industry and works best when your services, prices and operations are standard for your industry.
- Asset-based valuation: This approach requires a deeper analysis of a business’s assets and its net worth. A restaurant, for example, may have expensive kitchen appliances, shatter-resistant dishes, pricey booths and tables and a large inventory of vintage wine.
- Income-based valuation:Here the focus is on how much cash flow your business might generate in the future. While there’s no way to confirm this, a solid financial history with an upward projection for revenue is a good sign for lenders.
2. Get a signed letter of intent
It’s common practice for the buyer and the business seller to sign a letter of intent outlining the specific steps both parties will take to move forward with the arrangement.
While a letter of intent may not be legally binding, it can show lenders you’re serious about moving forward with the sale. Lenders may hesitate to approve your business acquisition loan if it seems like you and the seller aren’t on the same page.
An attorney can help draft an SBA or standard letter of intent, which both parties will sign.
3. Review your credentials
While specific business loan requirements can vary by lender and loan type, lenders typically review the following criteria when assessing your loan application:
- Credit score: Having a good personal and business credit score can increase your chances of getting approved for a business acquisition loan. While some lenders accept scores as low as 500, a higher score will likely unlock better rates and more flexible terms.
- Time in business: Traditional banks and SBA lenders typically require your company to operate for at least one to two years before you can qualify for business acquisition financing. However, newer businesses can approach start-up-friendly online lenders like Taycor Financial and Fora Financial to explore options.
- Annual revenue: Lenders generally want to see your company generating a steady cash flow to reassure them you can handle debt repayments. While having an annual revenue of around $100,000 or higher could strengthen your loan application, lenders like Taycor Financial don’t impose minimum revenue requirements.
4. Compare lenders
After finding business acquisition lenders that fit your criteria, you can dive deeper to learn about their fees, rates, customer support and more. Reading business lender reviews in advance can help ensure a lender is legit before you sign the dotted line. Some lenders also offer perks, like free business coaching, rewards programs and early payoff discounts.
5. Gather necessary documents
Organizing your business paperwork in advance can help ensure you have everything you need before applying. While exact requirements vary by lender, here are some common loan documents many lenders require:
- A recent business valuation
- Recent tax returns for the business you’re planning on purchasing
- A current profit and loss (P&L) statement from the existing business
- A proposed Bill of Sale, which must include the Terms of Sale
- The asking price and the schedule of inventory, equipment and furniture
- Projected financial statements, detailing a one-year income projection with a written explanation of how you plan to reach it
- Information about the business’s ownership and any affiliations
- Copies of business certifications and licensing
- Your personal and business tax returns from the previous three years
- A business plan outlining how you plan to use the funds
6. Apply and review offers
You can usually submit a business acquisition loan application online, although some traditional banks may require an in-person visit to finalize the paperwork.
If approved, make sure to thoroughly review the business loan agreement before moving forward. Now is the time to ask questions about repayment schedules, interest rates, additional fees and acceptable ways to use the funds.
What to look for in a loan
There are numerous options to choose from when looking for a loan to buy an existing business or a franchise. Here is a breakdown of what to consider when comparing your financing options.
Interest rate: While rates will vary based on your personal and business qualifications, shopping around can help you find the deal that best fits your budget.
Repayment term: Picking a longer term can help make your monthly payments more manageable, but you will likely end up paying more interest over the long run. If your budget can afford it, opting for a shorter term can save you more.
Time to fund: Ask the lender how long it typically takes to have funds deposited into your account. If you need access to capital fast, going with an alternative lender can help you save time. In contrast, an SBA loan to buy a business could take several months to process.
Additional fees: Some lenders and loan types, such as the SBA 7(a) loan, charge additional fees. These can include origination fees, late payments and business loan prepayment penalties.
Collateral: Some business acquisition loans are secured business loans, meaning you must secure them with collateral like equipment, real estate or cash. If you fail to repay the debt, the lender could seize your collateral to repay the debt.
Alternatives to business acquisition financing
A loan isn’t your only option when looking to purchase a business or franchise. Other financing options include:
- Lines of credit: If you want access to funds on a revolving basis, a business line of credit could provide up to $250,000 or more, with interest only applied to the funds you withdraw. While this might not be enough to purchase a business outright, it can help cover some basic costs when getting started.
- Venture capital: Another option for funding an acquisition purchase is venture capitalism, which is where investors contribute funds in exchange for a piece of ownership in the business. While you don’t have to pay interest or repay the investment, you essentially give up a portion of your business’s equity.
- Crowdfunding: You can collect donations from friends, family and the general public via a crowdfunding platform, such as GoFundMe for business. While crowdfunding platforms typically deduct a small fee for their services, you don’t have to pay anything to run a campaign and receive donations.
- Small business grants: A range of small business grants are available through state and federal government agencies and private corporations, which could help cover some of the costs of buying an established business.