How to Use Business Loans to Fund a Company Acquisition in the U.S.?

What Is a Company Acquisition?

A company acquisition occurs when one business purchases some or all of another business. The buyer, known as the acquiring company, may purchase the entire business or obtain a controlling interest in it through a takeover.

Small business mergers and acquisitions are different in nature. Unlike mergers, where two companies combine into a new or existing corporate structure, an acquisition involves one party purchasing ownership of another business. Company acquisitions can support growth, expansion, diversification, or consolidation within an industry to achieve economies of scale.

Business acquisitions, often requiring approval from the target company's board of directors, may involve purchasing the target company’s assets, ownership interests, or both. As a result, this structure can affect taxes, liabilities, financing requirements, and the responsibilities assumed by the buyer.

Common company acquisition structures may include an asset purchase, where the buyer purchases selected business assets. It may also be an equity purchase, where the buyer acquires ownership interests in the business entity.

In short, acquisitions can also be classified by their strategic purposes:

• A vertical acquisition involves businesses at different stages of the supply chain.

• A horizontal acquisition involves companies operating in the same market.

• A conglomerate acquisition involves businesses in unrelated industries.

• A congeneric acquisition, like a bank acquiring an insurance company, involves companies serving related markets or customers without offering identical products.

How Can Business Loans Fund a Company Acquisition?

Business loans provide some or all of the financing needed to complete a purchase for a business acquisition. Depending on the lender and loan program, you can use the funds for:

• Purchase price: Funds can be used to finance some or all of the cost of acquiring a business.

• Equipment: You can purchase eligible equipment or other assets needed to operate the acquired business.

• Working capital: You can cover eligible operating expenses after the company acquisition.

• Business improvements: Funds can be used to support the business after the transaction.

• Existing debt: In some cases, you can refinance eligible business debt as part of the transaction.

However, before approving business funding for a company acquisition, lenders evaluate whether the acquired company’s cash flow can support new debt. They may also review your credit history, financial position, collateral, and relevant management experience.

You can also combine a business loan with an equity contribution or seller financing. This may help you reduce the amount that must be borrowed and help you meet lender requirements.

How Do Mergers and Acquisitions Companies Help with Acquiring a Business?

Mergers and acquisitions companies can assist you throughout the acquisition process. These firms may help you identify potential businesses, evaluate acquisition opportunities, negotiate transaction terms, and coordinate the closing process.

You can seek an M&A advisor’s help to assess the target company’s financial records, operations, assets, liabilities, and growth prospects. This process often includes due diligence to identify potential financial, legal, operational, or regulatory issues before completing the purchase.

The top mergers and acquisitions consulting firms also support business valuation by analyzing financial performance, assets, market conditions, financing assistance, and negotiations. So, if you are looking for professional guidance, you can evaluate the best mergers and acquisitions companies based on industry experience, transaction history, and services offered.

What Business Loan Options Can Be Used for Company Acquisitions?

There are several business loan options that you can use for a company acquisition. However, approval depends on the transaction and your qualifications.

1. SBA Loans

SBA loans are backed by the U.S. Small Business Administration and can be used for eligible business purchases. These loans offer longer repayment periods and lower interest rates than some conventional financing options. However, the requirements for SBA loans vary by loan program and lender. You should always confirm whether your planned acquisition qualifies before applying for SBA loans.

2. Term Loans

Term loans provide a lump sum loan amount upfront and may be suitable for established businesses with strong financial records. These loans may be offered by traditional banks that evaluate your credit history, cash flow, financial statements, collateral, and your ability to repay the debt before approving term loans.

3. Seller Financing

Seller financing allows the current business owner to finance a part of the purchase. It can supplement a business loan and reduce the amount of outside financing required.

4. Alternative Business Loans

There are various alternative lenders who offer business loans with different qualification standards, loan structures, and funding timelines. You should compare interest rates, fees, repayment schedules, collateral requirements, and other terms before choosing an option.

In short, choosing the right financing structure depends on your company acquisition strategy, transaction size, business performance, and your financial position.

What Do Lenders Look for When Financing a Company Acquisition?

Lenders assess several factors before approving a business loan for a company acquisition. These include:

• Credit history: Lenders may assess your personal and business credit profiles for eligibility and loan terms.

• Cash flow: Lenders assess whether the business generates enough cash to support loan payments.

• Financial statements: Revenue, expenses, profitability, assets, and liabilities help establish financial strength.

• Down payment: Some financing arrangements require the buyer to contribute equity toward the purchase.

• Collateral: Certain business loans may require business or personal assets as security.

• Business valuation: Lenders may review the value of the business and its assets compared with the proposed financing.

• Management experience: Relevant industry and operating experience can strengthen an application.

• Transaction structure: The lender may review the purchase agreement, ownership structure, and intended use of funds.

• Debt-service capacity: Projected cash flow must generally support the proposed debt obligations.

Additional Note: Lenders may also consider the company’s customer base, intellectual property, existing contracts, and competitive position. Regulatory considerations can matter as well. For certain transactions, antitrust laws may also affect whether the deal can proceed.

How Much Can You Borrow for a Company Acquisition?

There is no single loan amount that applies to every company acquisition. The loan amount offered by a lender can depend on:

• Purchase price: The total amount required to complete the acquisition.

• Business cash flow: The target company’s ability to generate enough cash to support loan payments.

• Credit profile: Your personal and business credit history may affect eligibility and terms.

• Collateral: Available business or personal assets can influence the amount a lender is willing to finance.

• Equity contribution: The amount you contribute toward the purchase can affect the required loan amount.

• Financing program: SBA-backed loans, bank loans, and alternative financing may have different borrowing limits and requirements.

• Existing debt: Current obligations can affect the borrower’s overall debt-service capacity.

• Business performance: Revenue, profitability, and financial stability can influence the lender’s assessment.

You should determine the total funding requirement before applying for a business loan for a company acquisition. This should account for the purchase price and any eligible working capital, equipment, or other business expenses required after closing.

How to Apply for a Business Loan to Fund a Company Acquisition

You can follow a structured application process to apply for a business loan to fund a company acquisition.

1. 1. Determine the total funding requirement: Review the proposed purchase price and identify how much capital you can contribute.

2. Review the target business: Analyze financial statements, tax records, debts, contracts, assets, and operating performance before seeking financing.

3. Check your financial profile: Review your credit history, existing obligations, available collateral, and ability to contribute equity.

4. Compare financing options: Evaluate banks, SBA lenders, and alternative financing providers based on loan amounts, rates, fees, repayment terms, and eligibility.

5. Prepare documentation: Lenders may request tax returns, financial statements, bank statements, purchase agreements, valuation documents, and information about existing debts and assets.

6. Submit the application: Provide accurate information about the buyer, seller, transaction, and intended use of the funds.

7. Complete underwriting and due diligence: The lender reviews the application, financial information, transaction details, and repayment capacity.

8. Review the loan agreement: Before closing, review the interest rate, fees, repayment schedule, collateral requirements, guarantees, and permitted use of proceeds.

9. Close the financing and acquisition: Once the lender and other parties complete their requirements, the financing can be finalized, and the transaction closed.

The Bottom Line

A company acquisition can provide a way to expand an established business, enter new markets, or increase operational capacity. Business loans can help fund these transactions when the buyer, acquisition target, and financing structure meet lender requirements.

Before applying, you should evaluate the business’s financial performance, determine the required funding, compare loan options, and understand the full repayment obligation. Working with qualified financial and legal professionals can also help you evaluate risks and structure the acquisition appropriately.