Looking to buy a business that’s already up and running? Unless the business you’ve chosen is family-owned, you’ll need funding to get the deal done – probably a lot of it. Business acquisition loans are usually your best bet for obtaining financing to cover this big investment you’re making. But with different options to consider it’s important to find the right one for you and your new company.
Getting Ready to Buy an Existing Business with a Small Business Loan
The most difficult part of acquiring a business is usually having the money on hand to do it. When you haven’t got cash available to cover the asking price, you’ll need to get a loan to pay the current owner what they’re owed. That’s where understanding how to get a loan for business acquisition comes in handy.
Lenders generally have strict standards that you and your new business or franchise will have to meet. Before offering a business an acquisition loan, banks will examine dozens of factors to determine if you’re eligible. For starters, they’ll look at the financial history of both the borrower and the business being acquired. You’ll also need to have an airtight business plan for your venture, so the loan provider is confident the transition to a new owner will succeed.
Essentially, you have to make a case to the lender that everything will work the way it’s supposed to when you take over the business. Lenders want as much assurance as they can get that you’re making a good decision and that your new business will succeed. You’ll have to overcome a number of roadblocks to convince a lender that you’re worth it.
Types of Loans for Business Acquisition
Once you’ve buttoned up your plan, there are a few different types of business acquisition loans for you to consider. The most viable option often depends on your type of business and your funding situation. Below you’ll find the main types of business acquisition loans to pay attention to.
SBA 504 Loans
If your goal is to buy an existing business, an SBA loan is a good starting point. The SBA 504 loan (we’ll cover the SBA 7(a) type later on) is a great first choice to consider. SBA 504 loans generally have the most appealing interest rates compared to other business acquisition loan types. Additionally, you’ll find that SBA loans have some of the longest available repayment periods on offer.
The drawback of trying to get an SBA 504 loan is the list of requirements that lenders often mandate in order to qualify. Even if you qualify, the process can still take months. But if you do plan to go the SBA loan route, you’ll have a good chance of getting approved with the 504 loan if your goal is to buy an existing business. SBA lenders tend to avoid startups, as they don’t have a track record of financial information, unlike existing businesses.
Like all SBA loans, 504 loans are guaranteed by the Small Business Administration up to a certain cap, so a traditional lender will generally evaluate you for an SBA loan first. It’s the safest route for the lender, and you may have a better chance of being approved, especially if you can’t provide the collateral required to get a fixed bank loan.
Securing an SBA loan depends heavily on your credit score. The better borrowing history you have, the better chance you have of getting approved. Some of the top SBA lenders include Wells Fargo, JP Morgan Chase, Celtic Bank Corp. and Huntington National Bank.
Traditional Term Loans for Acquiring a Business
One of the simplest options for business acquisition loans is the traditional term loan. These types of loans come with a pre-determined interest rate and regular monthly payments. It’s the epitome of a business loan: You borrow a certain amount of money for a specific business use, and then pay it back over a pre-determined length of time with a fixed interest rate.
Traditional term loans are some of the most widely used types of business acquisition loans. Like a mortgage, they have predictable payments and usually fit in well with the other regular costs of running a business. Term loans can be a great way to amortize the long-run costs of acquiring a business.
The downside of traditional term loans? Well, lenders will usually hold you to high standards to approve funding. Applications are extremely lengthy because your banker will need to get approval from various different departments on the structure and terms of the loan. It’s not uncommon to have to apply multiple times, even at the same bank, so be prepared for the extra delay these loans could add to your plans of buying the new business.
SBA 7(a) Acquisition Loans
If you’ve decided an SBA 504 or traditional term loan isn’t for you, then you may want to look into the SBA 7(a) loan. The Small Business Administration guarantees most 7(a) loans, which provides a higher incentive for lenders to approve small business owners, even if the venture carries a bit more risk. The administration makes a key goal to get as many approvals as possible while keeping the risk low for lenders.
What distinguishes the SBA 7(a) loan from others is that it guarantees up to $5 million for small business owners to borrow. From there, you can make essential utility, real estate, and startup purchases.
However, lenders usually don’t provide the full purchase amount to you. It’s standard for borrowers to be required to put down a 10-20% down payment. For example, Chase provides up to 75% of the purchase amount, with a cap of $3.75 million.
Unlike other loans, SBA 7(a) loans come with a variable rate, which is dependent on the U.S. prime rate. In general, the rates vary from 6-9%. This adds a bit of complexity to the payments you’ll be making, and your costs may rise or fall depending on how the broader economy is doing. If you’re borrowing over $150K, guarantee fees often apply, which start at 3%. There are also a number of additional fees to watch out for, such as application and prepayment fees.
If you’re in need of a business acquisition loan that has a longer repayment term, the SBA loan is probably the right one for you. With terms of up to 25 years for real estate, you’ll be seeing low monthly payments. However, if you opt for a longer repayment term, your interest rate will be higher and could fluctuate during that amount of time. So be sure to examine whether or not the cost of long-term interest payments is worth the increase in capital costs, compared to shorter-term loans.
Alternative Financing for Business Acquisition
There are also some alternative options if the above loan types aren’t appealing for your small business.
Biz2Credit, for example, offers loans for small businesses ranging from $5,000-$5 million in funding, which can give your small business the boost it needs to start making acquisitions. Biz2Credit doesn’t lend to startup companies, so it’s perfectly tailored for an established small business looking to expand.
Related: A Small Business Guide to Merchant Cash Advances and When to Use One
The bottom line is this: when deciding which business acquisition loan is right for you, pay attention to all the factors. You’ll have to take an in-depth look at your current finances, your borrowing history, and what your future business plans are before you can convince a lender that your newly acquired business will be a safe bet.