Through business acquisitions, entrepreneurs can buy established companies that possess the infrastructure, brand reputation, and customer base that a business needs. However, a critical move like purchasing an existing firm or obtaining a major asset comes with complex processes and involves a number of steps, one of which is determining the best strategy to finance the newly acquired assets.
Business acquisition loans can be a great financing option for many business owners since they pose fewer liquidity risks and allow businesses to better manage their cash flow during high investment periods.
The amount of money you can borrow through an acquisition loan varies by lender and can range from $5,000 to $5,000,000.
So what are business acquisition loans exactly?
A business acquisition loan is a form of loan provided by banks and non-traditional lenders to purchase an existing business, franchise, or asset, and, like other loans, it creates a debt that must be repaid with interest. The purpose of the borrowed loan as well as when it can be used is clearly stated and agreed upon before the loan is made available to the borrower.
There are various types of acquisition loans available, and it’s important to choose the right one for your needs. Some common types include lines of credit, term loans, asset-based loans, and SBA loans.
Can You Calculate a Business Acquisition Loan?
An acquisition loan is a great way to scale up your business, but it’s important to carefully evaluate the costs and requirements before applying.
You can use online business loan calculators to estimate how much money you’ll need to purchase the asset, including the repayment amount and total expenditures.
Here are some tried and tested options to assist you with your calculations:
- Business Loan And Interest Rate Calculator by Bankrate
- Business Loan Calculator by Forbes
- Business Loan Calculator by Calculator.net
Types of Business Acquisition Loans
The commercial lending marketplace abounds in different types of loan opportunities, but not every business loan will be the right choice for your acquisition financing.
Before diving deep into separate loan types, it is helpful to understand that most loans can be acquired through 3 main financial institutions. Those are
- Banks and credit unions: provide traditional term loans and a great selection of loan products with fixed interest rates and predictable repayments.
- SBA lenders: designated gateway banks approved by the US Small Business Administration that provide government-guaranteed loans with competitive interest rates and terms. The Small Business Administration (SBA) is an independent agency of the federal government that was created to support and protect the interests of small business owners.
- Online lenders: financial institutions that offer term loans, as well as lines of credit with streamlined digital application and funding processes as an alternative to traditional banks.
Here is a closer look at some business acquisition loan choices to help you figure out which one is right for you.
SBA Loans
SBA loans are a popular choice among small business owners.
SBA-guaranteed loans are made through banks, credit unions, and other lenders who partner with the SBA. The federal government guarantees 85% of the loan amount — and this guarantee encourages lenders to work with small business owners who might not otherwise qualify for a loan on their own. If the lending institution fails to recover an SBA loan, the federal government will pay part of it.
Be very careful about which SBA loan you choose; if you aren’t sure which one is best for your needs, seek help from a professional.
The Business Term Loan Option
Under this system, the entrepreneur receives the funds and pays back the same in pre-agreed fixed installments. While this category of small business acquisition loans generally comes with the best interest rates, they are typically difficult to qualify for.
Term loans are an ideal financing option if you have an established business with great cash flow and a minimum credit score of 600.
Revenue-based loans
Entrepreneurs who take revenue-based loans would have to remit a certain agreed percentage of their business’ earnings every month until the sum that they borrowed is fully paid in addition to interest.
Business Acquisition Loan Requirements
Most lenders will consider a broad range of factors when reviewing loan applications. However, there are 4 main areas they will focus on during the approval process.
- The creditworthiness of a company
- The time business has been in operation
- Secure assets or equipment as collateral
- P&L or bank income statements to show profitability
Other things you would need when applying for a business acquisition loan include the following:
- Debt schedule documentation showing all your corporate liabilities and debts.
- Letter of intent showing your intended business acquisition terms
- Personal financial statement to help the lender determine your repayment capability.
- Tax returns documents
What Credit Score is Needed for a Business Acquisition Loan?
Credit scores are a vital consideration for most lending institutions when lending business acquisition loans. Scores from 640 to 700 are typically deemed worthy of consideration.
What are the Pros and Cons of Applying for Business Acquisition Loans?
Pros:
- They enable new entrepreneurs to achieve rapid business growth.
- Such loans make it easier to acquire businesses.
- They help entrepreneurs improve their credit scores.
Cons:
- Some business acquisition loan packages, such as 100 business acquisition loans, may contain overly stringent conditions.
- High-interest rates attached to business acquisition loans can affect business profitability.
Summary
A business acquisition loan can help businesses expand and get a larger market share. However, it is necessary for business owners to carefully evaluate their options when going for 100% business acquisition loans or other types. One also needs to choose a lender that provides flexible loans under the best conditions.
