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Small Business Acquisition Loan

Date published: October 31, 2022
A small business acquisition loan can help you receive funding to purchase a franchise or other small business. Keep reading to learn more about the terms, conditions, and requirements of a business acquisition loan.
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What is a business acquisition loan? Business acquisition loans are a type of financing you may use when purchasing an existing franchise or starting a new business of your own. Business acquisition loans bring many benefits.

What is a business acquisition loan? Business acquisition loans are a type of financing you may use when purchasing an existing franchise or starting a new business of your own. Business acquisition loans bring many benefits.

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A business acquisition loan can help you:

  • Purchase an already successful business
  • Grow your business by acquiring a competitor.
  • Open a new location a competing company once occupied
  • Buy out a partner from a business you already own

Types of Business Acquisition Loans

Maximum Funding Amount

Between $5,000 and $5 million

Funding Term

Up to 25 years

Interest Rates

4.75% to 6%

Time to Funds

Between one month and nine months

There are several types of loans you might pursue when funding a business acquisition. You’ll want to ensure you’re picking a loan that will provide the amount you need with reasonable repayment terms and interest rates. The requirements to receive the loan and the amount you are offered vary by lender.

The types of business acquisition loans you might find yourself pursuing are:

  • SBA 7(a) - Small Business Acquisition Loan
  • Startup Loan
  • Term Loan (Long-Term and Short-Term Business Loans)
  • Equipment Financing

An SBA-loan is one of the most common bank loans used by business owners and is aided by the United States Small Business Association. The United States Small Business Association presents a guarantee to a bank, who, in turn, will provide the business owner with a loan.

With an SBA-loan, the bank won’t have to worry about a lot of risk in the case that you, the borrower, may not be able to pay back your debt. As a result of that, with SBA-loans, a bank will typically offer low interest rates and longer terms in order to pay back a debt.

An SBA-loan is considered to be of higher quality and is known to offer appealing terms. It is one of the more affordable options for business owners to pursue. However, the application process can be relatively long, and it can take some time to receive approval and funding.

You can learn more about SBA-loans through the resources that the SBA has posted on its website.

With an SBA-loan, the United States Small Business Association is looking for a business owner who has both respectable personal and business credit, as well as no red flags. If you have qualified for an SBA-loan, you may be able to receive anywhere up to five million dollars.

Close up on small business loan applicationA Startup-loan is a great choice for business owners that don’t already own a business or want to get a loan for their startup. In order to receive a loan for a startup business, owners will need to make it clear they possess the skills, experience, and resources that are essential to running a business.

An owner may obtain a Startup-loan from a bank, the United States Small Business Association, or a private lender. It’s harder to receive a Startup Loan than it is an SBA-loan as the funds will come from a lender who may be hesitant in providing a large sum of money to someone who is not receiving a lot of revenue or has poor credit history when applying. Lenders will want to see that you have a strong, concrete business plan and a stable credit history.

Although similar to term loans, Startup-loans are easier to qualify for as lenders are lenient with the years of experience you must have prior to submitting an application. With a term loan, you must already have two years of experience in business.

Long Term loans provide a wide range of ways in which you may use funds to support your business. However, these loans will require fixed payments on a monthly basis and higher interest rates. Long Term loans are usually expected to be repaid somewhere within three to ten years. Large amounts of paperwork will be required in order to apply for a long term loan, which can contribute to the longer wait times. Business owners may also need to bring at least two years of experience, a solid credit history, and collateral in order to qualify for a loan. Business owners can receive long term loans from banks and online lenders.

Unlike long term loans, short term loans need to be repaid within three to 18 months and have looser requirements as well as higher interest rates.

Equipment Financing is beneficial as equipment can be a major expense in the acquisition of a new business. With this type of financing, no extra collateral is required. Essentially, your purchase price will be based upon the value of the machinery and the equipment that you will receive. Due to this, interest rates are typically lower, and repayment plans are manageable.

Requirements for a Business Acquisition Loan

  • Decent Business and Personal Credit Scores – Lenders may look for a credit score that is above 650. A lender wants to know that you are a dependable and stable individual. A lender will need to trust that you are capable of paying back any debt you may gain. The minimum credit score you will need depends on the lender and the financing you may choose. If you have a high credit score, you might have an easier time negotiating interest rates.
  • Letter of Intent (LOI) – A letter of intent outlines the terms and steps for the acquisition. The seller and buyer will sign the letter of intent to initiate the acquisition. Typically, a LOI demonstrates to the lender that you have thoroughly planned the acquisition.
  • Valuation of a Business – The valuation of a business shows how much that business is worth. If the business valuation is high, the borrower may receive a higher loan amount, as they will be seen as less of a risk.
  • Financial Documents – A lender will need to see financial documents and information to determine whether or not you are likely to generate enough income for repayment. A cash flow statement will determine the amount of cash that enters and leaves your business. A balance sheet summarizes a business’s liabilities, obligations, net worth, and assets. An income statement will show the revenue your business makes over a period of time, as well as any losses.
  • A Business Plan – Having a business plan will show a lender the objectives, goals, and steps you have set in place for your business. A business plan will show a lender you have done your research and have composed a strategy for your business.

Acquisition Funding at a Glance

Business acquisition funding can provide you with capital to purchase a business, franchise, or asset. Your company’s assets will be used as collateral. The interest rate is typically lower for this type of funding than other small business funding options.

Small business owner running coffee shopBefore you’re qualified for acquisition funding, the provider will look at:

  • The value of your company. The provider will want to make sure you aren’t purchasing a business that is worth substantially more than the business you already have.
  • Your experience as a business owner. The lender will want to make sure you know how to run a company. To determine this, they will look at how you have performed at your own company.
  • The performance of your company. Your business should be stable. If your company has been losing money, then the lender will be less likely to approve you for funding.

The SBA 7(a) loan can sometimes be used for acquisition funding. This can be an ideal solution for eligible companies because SBA loans tend to have lower interest rates.

Main Advantages

  • The main advantage of acquisition funding is the low interest rate. This interest rate is low when compared to other types of small business funding options. Please note that your rate will be unique to you. You should compare it to rates that are similar to other business acquisition funding options, like the SBA 7(a) loan we mentioned earlier.
  • With acquisition funding, it’s likely that you may be able to grow your business faster than what you had originally expected otherwise. Acquisition funding can give you a higher chance of achieving your business objectives and goals.
  • Funding that allows for longer terms of repayment will make for easier monthly payments and will give a little bit of relief to your cash flow. This can be especially useful during a business’s early years.

Main Disadvantages

  • One of the biggest disadvantages of acquisition financing is how long it takes to get your funding. The provider can take up to nine months to review your application and make a final decision. A lot can happen in nine months, and the investment opportunity might have passed by then.
  • Down payments may be required for a business acquisition loan. In some cases, you may be required to make up to 50% of a down payment.
  • Some types of acquisition funding will have high-interest rates that can hurt your cash flow and prevent your business from becoming profitable. Interest rates will depend on the type of business acquisition loan you choose, as well as the lender you choose to carry it along.

Acquisition Funding Wrap-Up

If you are thinking about applying for acquisition funding, you should apply as early as you can. The long wait time can be prohibitive to many types of investments, so it’s best to submit the application sooner rather than later. During the months it will likely take to get a decision from the provider, you may need to investigate alternative funding sources that can get you the money faster.

Frequently Asked Questions

Will the Value of the Business be Considered?

Yes. Lenders will assess the value of the business when determining whether you qualify for an acquisition loan. The value of your business can be determined based on:

  • The market: your business is compared to similar companies in the industry
  • Assets: your business’s net worth is considered
  • Income: your business’s cash flow and future profits are considered

Can I Build Business Credit with an Acquisition Loan?

Yes. If you make timely repayments, your business credit score can increase. However, keep in mind that your credit can also decrease if you fail to make repayments or default.

Is It Possible to Get an Acquisition Loan with No Credit Check?

Unfortunately, no. Every lender conducts a thorough credit and finance check before determining your eligibility for an acquisition loan. Beware of lenders advertising no credit check business loans. These financers may be involved in predatory lending practices.

Can I Use an Acquisition Loan for General Business Expenses?

Unfortunately, no. Acquisition loans typically come with rules regarding what the money can be used for. Additionally, these loans must be used within a specific period of time. Failure to use the funds in time or for the approved purpose can result in the loan no longer being available.

Is Collateral Required?

Collateral may be required by some lenders. If you opt for a secured acquisition loan, you may have to provide the property or business as collateral. Should you default on the acquisition loan, your assets may be repossessed by the lender.

Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.