With a business acquisition loans, you could purchase a company that already has a successful history. You could also use acquisition financing to buy out your partner(s) in a business you already operate.
What Is A Business Acquisition Loan?
A business acquisition loan could allow you to buy someone else’s existing, profitable business. It could also allow you to buy out your partner(s) for a business you already own. In addition, business acquisition loans may be used to finance the purchase of a franchise, especially a well-established one with many locations and a proven model for success.
Sometimes it’s smart to use a business acquisition loan to purchase a thriving company; turnaround financing can be much more difficult to secure.
How Business Acquisition Loans Work
To secure small business acquisition financing, you’ll need to prove that both you and the business present minimal risk to the lender. You can do this by providing ample documentation of both your personal finances and the business’s finances. Good credit, minimal debt, and profitability are key. Small business acquisition loans are available from banks and sometimes from the business seller. If you can’t secure financing by other means, try getting an SBA loan to buy a business.
How to Qualify
Lenders won’t necessarily have hard cut-offs on particular loan qualifications; what they’ll want to see is a strong overall picture. So, for example, if you have excellent credit and high-value collateral, the lender might only require a small down payment of 10%. If you have merely good credit and good collateral, you may need double or triple the down payment. Even with excellent personal finances, it may be irrelevant if the business is in terrible shape. Demonstrate that the lender won’t be taking on too much risk; show that you and the business you want to buy are strong candidates to repay every penny with interest.
What are underwriting criteria for business acquisition?
Specific business acquisition loan requirements vary by lender and loan type, but all will want to see a strong personal and business financial history. If you want to get a loan to buy a business, it will need to show at least two to five years of stable or growing revenue and overall profitability. If the business has any financial weaknesses, you may be able to compensate for them by pledging sufficient collateral. Lenders may not include name recognition and industry goodwill in their decision since these assets are difficult to value and might be unique to the current owner.
Business acquisition lenders might look more favorably on professional services firms with steady income, such as medical and dental practices, veterinary practices, accounting firms, and law firms. They may look less favorably on risky businesses such as restaurants, strip clubs, and gambling establishments. They could also consider buyouts less risky since you have already shown some experience running the business successfully; the perceived risk of instability is lower. What are the personal finance requirements for a business acquisition loan? Lenders may want to see two to three years of your personal tax returns.
Having a credit score of 680 or higher will give you the best chance of getting your business purchase loan approved, and a higher credit score will help you secure a lower interest rate. You’ll also need a personal financial statement and verification of your down payment and/or collateral. You may be asked about your personal history of bankruptcy or foreclosure. For SBA loans, you must not be delinquent on any debt payments you owe to the U.S. government. Learn more:
How will the business being acquired be evaluated?
The current business owner will need to provide the lender with information about its financial condition.
The lender will want to see a balance sheet showing the value of the company’s tangible, fixed assets (some of which could serve as loan collateral) and its liabilities and debts. They’ll also want to see two to three years of tax returns and an income statement. Lenders desire strong cash flow, profitability, and reasonable debt levels (or no debt at all).
The business should also have a good credit score and not be delinquent on payments to lenders, suppliers, or employees. If the lender discovers a problem with the business and rejects your application, you will probably feel disappointed at first, but try to look at the outcome this way: You’ve been spared a risky investment!
How to Request a Business Acquisition Loan
You’ll typically need to submit the following documents to request a business acquisition loan:
- Business Plan
- Business Tax Return
- Balance Sheet
- Personal Tax Return
- Bank Statement
- Business Lease Agreement
- Business Debt Schedule
- Business License
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