Buying an existing business or franchise can be a complex process, and one of the first things you’ll want to figure out early on is how to finance it. External financing may be necessary to cover the various expenses involved. A business acquisition loan could be just what you need to grow.
Small business loans can serve a variety of needs, from purchasing equipment to providing working capital for day to day expenses. A business acquisition loan is a small business loan that's designed for financing the purchase of an existing business or franchise. If you own a business with one or more partners, you could also use this type of loan to finance a partnership buyout.
The amount you can borrow varies by lender, as do the requirements to qualify for a business acquisition loan. Compared to other types of loans, acquisition loans may have more stringent criteria you'll need to meet for approval.
There are four specific financing options you could use to acquire a business: Small Business Administration (SBA) loans, term loans, startup loans and a Rollover for Business Startups (ROBS). Understanding how they compare can help you narrow down which type of loan is the best fit for your situation.
The SBA is not a direct lender. Instead, this government agency partners with banks and lenders to secure loans granted to business owners.
There are several SBA programs available to business owners but 7(a) loans are typically best suited for business acquisition. A 7(a) loan can offer up to $5 million in funding, at competitive interest rates. The time you have to repay the loan can extend up to 25 years (for commercial real estate).
Qualifying for an SBA loan may be easier for established businesses with strong revenues and good credit. There is a down payment required for SBA loans, which is typically between 10 and 20 percent. There's also a separate SBA guarantee fee borrowers must pay.
If you are able to qualify for an SBA loan, one downside to keep in mind is funding speed. It could take up to 90 days or longer for your loan application to be approved and for the loan to be underwritten. That type of time frame may not be suitable if you're trying to move quickly on a business or franchise purchase.
A term loan offers a lump sum of capital, repaid at fixed installments over a set time period. Rates may be fixed or variable for term loans and borrowing amounts are typically lower than SBA loans.
You can find term loans through banks, credit unions or online lenders. Repayment terms are often in the five-year range, although this can vary by lender.
Most term loans are secured, and you may be asked to sign a personal guarantee — which holds you, the business owner, personally liable if your business fails to make payments.
Generally, approval for a term loan is contingent on many of the same factors associated with SBA loan approval: time in business, credit scores, revenues. A key difference is funding speed. You may be able to complete the loan process and get funded in a few business days with an online lender, versus several months with the SBA.
Startup loans are designed for new entrepreneurs who are in the early stages of launching a business. That includes acquiring a business or franchise.
A startup loan is similar to a term loan but they may be easier for new business owners to qualify for. While a term loan might require you to have at least two years in business, for example, startup loans are more lenient.
That being said, you'll still need to have a solid business plan and a good credit history. And some lenders may expect you to offer collateral or a down payment to secure a startup loan.
A Rollover for Business Startups (ROBS) allows you to access funds from your retirement account to invest in a new business. You can use the capital towards the cost of acquisition, working capital, or for a down payment towards another form of financing.
The major positive of ROBS is that you won’t face early withdrawal penalties, taxes or interest charges. And since it’s your own money, there are no repayments.
However, there are certain criteria you have to meet including that your retirement account is a tax-deferred account and either a Traditional 401(k) or IRA (Roth IRAs are not eligible), your business is a C-Corp, and you, the business owner, must be a legitimate employee in the business.
Additionally ROBs have a number of other regulatory requirements (such as offering a retirement plan to employees), and you’ll likely need to invest in ongoing relationships with legal and tax experts to stay compliant.
Setup fees can add up quickly, so you’ll need at least $50,000 in retirement savings for this form of financing to make sense.
There are both advantages and disadvantages involved in getting a business acquisition loan. Here's a quick look at how both sides compare:
Applying for business acquisition financing can be a tricky endeavor due to the number of factors lenders take into account: not only are your financials as a borrower and experience as a small business owner put under a magnifying glass, but lenders also want to know the history of the business being acquired (such as the business’s assets and liabilities), as well as your plan to make the acquired business succeed.
There are some key things to consider as you prepare to apply for a business acquisition loan. How you approach these issues can make a difference in how easily you're able to be approved, or if you're able to get approved at all.
This is an important question to ask since there's a large investment of time and money involved.
Before you get started, you should consider whether or not acquiring a business is the best tool for growth.
It's helpful to review your current cash flow to ensure that you can sustain the payments associated with a business acquisition loan, while also taking into account the financial state of the business you want to buy.
For instance, you'll want to know how profitable the business is, what the cash flow situation is like, and what's on the balance sheet. These are all things the lender will look at closely so it's important that you be familiar with the numbers.
Ideally, the business or franchise should be financially healthy, with clear indicators that it will remain that way once you've completed the purchase. Also, consider the timing. If you have other strategies for growing your business that are waiting on the backburner or more immediate needs, such as a new equipment, then it might make sense to defer the acquisition until you've addressed those items.
The lender is going to want to have the most accurate estimate possible for the value of the business you plan to buy. This valuation number is one factor lenders use to assess your risk level as a borrower.
You may need to get a formal business valuation from an independent company during the loan process. At the very least, you should be able to provide the lender with key financial statements pertaining to the business, such as a statement of cash flow, profit and loss statement, and balance sheet. The lender may also ask to see prior year tax returns from the business's current owner.
All of these figures are used by the lender to evaluate the business's profit margin. If the business doesn't prove profitable on paper, that could be a roadblock to getting an acquisition loan.
A letter of intent is drafted by the buyer and spells out the proposed terms of purchasing the business to the seller. You'll need a copy of this letter to share with your lender when applying for an acquisition loan. Typically, a letter of intent includes a clause stating that the offer is contingent on the buyer qualifying for financing. This gives you a way out of the deal if you fail to qualify for a loan.
Last but not least, you'll need to give the lender certain financial documents relating to your personal and business finances. That includes:
The lender will also check your business and personal credit reports and scores. Having each of the documents listed above prepared beforehand can save time during the application process.
Funding Circle offers business acquisition loans of up to $500,000 to help you buy a business that's similar in scope or function to yours. You may qualify if you've been in business for at least two years.
A business acquisition loan from Funding Circle can provide funding in as little as 10 days, with transparent rates and fees. You can get a decision in as little 24 hours after document submission, so get started today with your personalized rate quote!
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