Small Business Acquisition Loans: Uses, Requirements & More

November 3, 2021
business acquisition loan

Acquiring a business can be a great way to jumpstart your entrepreneurial endeavors. Someone else has already done the legwork of developing a brand, attracting customers, and sorting out the details of how to run the business. The only tricky part is acquiring financing to purchase it — that’s where business acquisition loans come in. 

What is a Business Acquisition Loan?

These are loans designed to help business owners acquire an existing business, a portion of a business (like buying out a partner), or a piece of vital business equipment (a bulldozer for a construction company). Typically, business acquisition loans have favorable terms compared to other forms of business financing. If a borrower cannot pay back the loan, the bank takes possession of the business or asset that was purchased and resells it. As such, it’s a much safer investment for the bank, allowing them to offer more favorable loan terms

Types of Business Acquisition Loans

There are a variety of options when it comes to financing a business purchase. Each comes with pros and cons, so you’ll want to carefully evaluate which type is right for your needs.

Conventional Loans: These are standard loans with fixed monthly payments over a set period of time. The lender will scrutinize your experience in the business world along with the business’s history that you’re hoping to acquire.

SBA Loans: Similar to conventional loans, SBA loans have more favorable terms as they’re backed by the federal government. However, you’ll need approval from both the Small Business Administration and a lender, which can take considerably longer than other financing options.

Revenue-Based Loans: Unlike conventional loans, these don’t have a fixed monthly payment due, but rather a percentage of the business’s earnings. They’re a great resource for business owners that have unpredictable revenue after the acquisition. 

Business Expansion Loans: This type of loan is for people who already own a business and want to buy a similar business for expansion purposes. This could include purchasing a business that is part of your supply chain to gain further control of your process.

Startup Loans: Startup loans are for prospective business owners that need financing to purchase an existing business. Lenders will require a significant down payment as your lack of business experience limits their ability to assess your risk. 

How Can I Qualify for a Business Acquisition Loan?

Getting financing to purchase an existing business can be a complicated process. Not only will your lender want to look at your creditworthiness and your plan to make the acquisition profitable, but also the history of the business you’re hoping to acquire. It’s a time-consuming process, but you can streamline it by having all of your documents ready and organized.

Start by Drafting a Letter of Intent

The first step in the process is putting together a letter of intent. You and the owner of the business you’re hoping to purchase will spell out the terms of the deal with a clause stating that the purchase is contingent on you receiving financing. 

Gather Your Records

Lenders need to know that you are a good investment. They’ll want to look over your credit history and the records of any businesses that you’ve owned — past and present. These records should show that you’re knowledgeable and can successfully run a business. 

Collect the Businesses Records

Your lender wants to know everything about the business you’re looking to purchase, and that means there’s going to be a lot of paperwork involved. You’ll need tax records, balance sheets, bank statements, profit/loss statements, cash flow statements, and a valuation of the business.

Make a Business Plan

If the business you’re purchasing is already successful and the owner simply wants to cash out or retire, their business plan should be enough to qualify for the loan. If you’re hoping to expand by buying out a competitor, you’ll need to show how you’ll transform the business into a profitable entity. 

Show Where the Acquisition Will Take You

If you’re buying an existing business, consider how long it will take to be profitable. Purchasing a vital piece of equipment? Have projections ready demonstrating how the equipment will transform the business — cutting costs or generating new revenue. The lender needs these projections to set the terms of the loans.

LendThrive Can Help

Are you ready to rapidly take your business to the next level by acquiring new equipment or by purchasing a new business? More than likely, you’ll need some help with funding.

LendThrive, part of the AVANA Family of Companies, can help with your expansion by approving you for a $25,000 to $150,000 small business loan in just 24 hours. We offer fixed interest rates with a Rate Reduction Rewards program that rewards customers for making consistent, on-time payments by reducing interest rates over time.

LendThrive’s process is easier and faster than most other financing options, allowing you to focus on building your process rather than worrying about how to acquire the capital to do it. You can be approved for a loan in as little as 24 hours, so apply today or contact us for more details.

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