How To Get A Loan To Buy A Business: 6 Types Of Business Acquisition Loans
If you are looking to purchase an already existing business, check out our top choices for business acquisition loans.
So you’re looking to purchase a business, either as a first-time venture into entrepreneurship or to expand your existing company by acquiring new assets. The only problem is, you’re short on the capital needed to take on such a venture.
If you have already started purchasing a business or buying out business partners, this is the time to look for a business acquisition loan. Let’s go over the main business acquisition finance types, plus some application tips and answers to common questions about business purchase loans.
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What Is A Business Acquisition Loan?
A business acquisition loan is used to buy an existing business, which might be an independently-owned small business or a franchise.
If you already own a business with a partnership structure, you can also use this type of loan to buy out your business partner(s). Certain types of business financing, such as SBA loans, are especially suited for purchasing a small business.
Pros & Cons Of Business Acquisition Loans
There are benefits as well as disadvantages to taking out a business acquisition loan. A business acquisition loan is a big commitment, but it can make sense for the right type of borrower.
Pros Of A Business Acquisition Loan
- Seize An Opportunity: A loan can allow you to take advantage of an opportunity to buy a business that you might otherwise miss out on if you don’t have the capital on hand.
- Long Term Lengths Available: Buying a business is a long term investment and many acquisition loan types, such as SBA business acquisition loans, have long term lengths of 10 years or longer.
- Fast Funding Options: Online business acquisition loans can come through in three days (or less!) from the time you’re approved.
- Collateral Isn’t Always Required: Unlike many loan types, business acquisition loans often do not require any collateral, other than the assets of the business you are purchasing.
Cons Of A Business Acquisition Loan
- High Income & Credit Requirements: Business lenders want to ensure borrowers are reliable and can afford to make repayments on their loans, especially if the loan isn’t secured with collateral. So, you will usually need strong cash flow and a good credit score to take out an acquisition loan.
- High Interest Costs: Because you’ll likely be repaying your business acquisition loan for many years, the interest costs will add up over time.
- Can Make It Hard To Get Additional Funding: When you have just taken out a business acquisition loan, it may be difficult to get an additional loan if you need more capital to run your newly acquired business—for example, for working capital or business improvements. It can be especially hard to get a second business loan if your first lender has placed a UCC filing on your business assets.
Where To Get A Loan To Buy A Business: 6 Business Acquisition Loan Options
There is no one-size-fits-all business acquisition loan. The right type of business acquisition financing depends on your situation — for example, whether you are a first-time business owner, whether you already own another business, how much capital you need, and the particulars of the business you’re buying.
As follows are the main types of business loans entrepreneurs can use to buy out a business to help you determine which acquisition financing options will work best.
1) Startup Loan
If you want to buy a business (and don’t already have an existing business), you might be able to get a startup loan. To receive a startup loan, you will be required to prove that you have the experience and resources available to run a business. Startup lenders might also require you to prove you’re serious about the venture by making a down payment on the business you’re acquiring.
Startup loans are offered by banks, the SBA, and other independent lenders. If you are purchasing a franchise business, you have certain startup loan options available to you as well as some online lenders that offer loans to purchase a franchise.
2) SBA Loan
SBA loans are bank loans backed by the US Small Business Association in amounts of up to 85%. Because there is less risk for the bank if you default, the bank can offer you a lower interest rate and longer repayment terms than they otherwise would. If you need a loan to acquire a business, an SBA business acquisition loan is one of the highest-quality loans you can get. However, SBA loans can have lengthy application processes, and it can take a while to get accepted and for the funds to reach your account.
That said, it is still possible to get a business acquisition loan through the SBA, even if you don’t have an existing business (particularly if you’re purchasing a registered franchise). You can consult the SBA’s lender match service to find eligible lenders for your business purchase as well as the other informational resources the SBA has on its website.
3) Bank Loan
As mentioned, banks do offer loans for business acquisitions, but the requirements are more strict than those of online lenders. The bank will scrutinize your credentials, the finances of the business you want to acquire, and other information related to your proposed business purchase. However, bank loans have terrific rates, and if you have the right credentials, it’s not impossible to get a bank loan — even if you don’t have an existing business. It will help to have relevant experience in the type of business you’re buying, partnered with steady personal income, and good credit.
Check out the best banks for small business loans if you’re thinking about applying for a bank loan. Also, bear in mind that, depending on how established your business is, a local community bank or credit union may be more likely to approve you than a large, nationwide banking institution would.
Note that while most banks still require a traditional, in-person application, a few banks (e.g., Wells Fargo) offer some alternative lender conveniences, such as an online loan application.
4) Equipment Financing
Depending on what type of business you’re purchasing, equipment and machinery could be among the largest expenses involved in your sale. If equipment is one of your new business’s major assets, equipment financing might help you afford the sale. While not a traditional loan, equipment financing lets you borrow against the equipment’s value, meaning there is no additional collateral required. Besides not requiring you to put up any collateral (other than the equipment itself), equipment financing contracts usually do not require a credit check.
Of course, while equipment financing alone won’t allow you to purchase an entire business, it might help you better afford a business acquisition. Check out our favorite equipment financing companies to see how the top options stack up.
5) Online Business Loan
Without question, it is easier to get a loan to buy a business if you already have an existing business and want to acquire another business of similar scope. If you already own a stable, profitable business, it’s definitely worth looking into a bank loan to expand your business with an acquisition.
However, even qualified business owners may not want to go through the arduous process of applying for a bank loan and might turn to an alternative/online lender that offers business acquisition loans. Rates for online business loans are higher than an SBA loan or regular bank loan, but online loans have a much easier application process and quicker time to funding. These lenders also have relaxed credit scores and time-in-business requirements, with some lenders accepting applicants with credit scores in the 600s and just 6 months to a year in business.
For more information on small business lenders from whom you might be able to get a business acquisition loan to expand your existing business, learn about the best small business loans available from alternative/online lenders.
6) Crowdfunding & P2P Lending
Crowdfunding can be another option if you’re looking for business acquisition money, though crowdfunding by itself likely won’t pull in enough funds to cover the entire business purchase. There are various types of crowdfunding for businesses, including equity-based crowdfunding and rewards-based crowdfunding. Even charitable giving sites can sometimes be used for business.
Crowdfunding could be an option for you if:
- Your business purchase will enable you to produce an innovative product with which you can reward your backers.
- The purchase will increase your business’s net worth, which you can share with your backers in the form of equity.
Similarly, peer-to-peer business lending allows business owners to borrow directly from interested investors in an online marketplace or even from peers in their personal networks. A third party provides an online platform that packages the loans and may charge a fee for their services. Because multiple parties typically fund P2P loans, the concept is similar to crowdfunding.
With crowdfunding and P2P lending, having an innovative, community-minded business plan and a strong online presence will help convince would-be investors to fund your business purchase. Generally, it helps to have some business experience/time in business for lenders/backers to be willing to take a chance on you.
How To Get A Business Acquisition Loan: 5 Tips For Applying
Before you can start applying for business acquisition loans, you’ll have to have some arrangements in place, such as a written agreement with the owner of the business you intend to purchase. Keep reading to learn what else you need to get a business acquisition loan, and make sure you get a good deal on that loan.
Tip 1: Thoroughly Vet The Business You’re Buying
It’s important to properly evaluate the business you want to purchase, make sure it’s worth what the seller is asking for it, and provide this information to lenders during the application process. The lender will need to see a professional business evaluation, including a list of business assets, the business’s profit and loss statements, and business bank statements.
Tip 2: Take A Hard Look At Your Credit
Your credit score and credit history will weigh heavily when applying for most types of business financing. Take whatever actions you can to improve your personal credit and business credit scores, including paying off any outstanding debt and disputing any errors that show up on your credit report. Even if you can’t fix up your credit substantially, it’s important to familiarize yourself with your credit scores (personal and business), so you know if you meet a loan’s minimum borrower qualifications.
Tip 3: Prepare Your Documentation
In addition to documentation regarding the business you’re buying, you’ll also need to supply the same documentation about your business — bank statements, tax returns, etc. You’ll also need a letter of intent (an agreement between you and the seller to purchase the business). Try to gather all of these and any other necessary loan application documents early on in the application process so that you have them ready when the lender asks for them.
Tip 4: Put Your Best Foot Forward
Your lender will also look closely at your business plan and your previous business experience. If you haven’t already, put together a detailed business plan to convince lenders why they should extend capital to you. Somewhere in your application, you also want to talk up your business experience since this will demonstrate that you are a capable and successful entrepreneur in your field. Need help? Read up on how to write a business plan.
Tip 5: Evaluate Multiple Financing Options
If you meet all the qualifications for a particular business loan, there are probably other loans you would qualify for as well. So you don’t necessarily want to accept the first loan offer you receive. Loans can differ greatly when it comes to their repayment term length, interest rate, collateral requirements, and other important aspects. Fortunately, online lenders make it easy to get preapproval offers so that you can compare various loans.
After filling out a short online application, an online lender will then verify your basic information and conduct a “soft” pull on your credit (the kind that doesn’t negatively impact your credit score). If you meet their requirements, they’ll respond with an initial offer, potentially within minutes. This fast and streamlined process makes it easy to pre-apply for multiple loans and compare their preapproval offers to choose the best one.
Business Acquisition Loan FAQs
Final Thoughts On Acquisition Loans
Buying a business can be an exciting and rewarding venture, but getting a loan to finance this purchase is tricky if you don’t have spotless credit or an already-established business. Fortunately, online lenders have made it easier for aspiring entrepreneurs to secure non-standard business loans, SBA loans, and other types of financing.
If, after reading this, you don’t think you will qualify for a business acquisition loan or you don’t want the commitment, this doesn’t mean it will be impossible to finance your business purchase. You can still look into alternative ways to fund your business.