A Guide To Business Acquisition Loans: What Are They And How Do They Work

The entrepreneurial dream often involves building a company from the ground up. But what about buying an existing business instead? 

Here's where business acquisition loans come in. They provide the financial muscle to acquire an established business or franchise or even buy out a partner.

Throughout this guide, we'll explore acquisition loans, the available loan types, and the key factors lenders consider when evaluating an application. Keep reading!

Related: How To Get A Loan To Buy A Business: All You Need To Know

What is a business acquisition loan?

A business acquisition loan is a financial tool for purchasing a business, franchise, or significant assets from another company. 

This type of financing can be particularly attractive for aspiring entrepreneurs, as it accelerates the company's growth and helps the new business owner and work team settle down easily. However, the buyer can only use the acquisition loan for the agreed-upon purpose and for a specific period.

Related: Best Businesses To Invest In: Why SaaS Acquisitions Are Worth It

Types of business acquisition loans

Although many different types of business acquisition loans exist, we'll outline the most common ones.

1. Small Business Administration loans (SBA loans)

The SBA offers various loan programs for business acquisitions. These loans are attractive due to their favorable terms, including longer repayment periods and potentially lower interest rates. However, the application process can be lengthy and competitive.

2. Term loans

Term loans are traditional business loans that work with a fixed repayment schedule and interest rate. They are a good option for acquisitions with a clear purchase price and predictable cash flow for repayments.

3. Asset-based loans

These loans use the assets of the business being acquired (inventory, equipment, etc.) as collateral. Asset-based loans can be a good option for borrowers with a lower credit score or limited operating history. However, interest rates tend to be higher for these types of loans. 

4. Seller financing

Also called owner financing, this is a deal in which the seller acts like a bank for the buyer. In other words, the seller agrees to finance a portion of the business's price. 

Regarding seller financing, Michael Frew, an expert on scaling digital business, said in The Boopos Buzz:

"I really enjoy having seller financing because that still keeps the seller involved in the business because, of course, they want that to come to terms that they can actually get all of the payment."

How much time does it take to pay an acquisition loan?

The repayment period for an acquisition loan can vary depending on several factors, for example:

• Loan amount: Larger loans will take longer time to pay back.
• Lender: Different lenders will have different repayment terms. Banks tend to offer longer repayment terms (5-7 years) compared to alternative lenders, who may offer shorter terms (3-5 years) with higher interest rates.
• Loan type: Certain SBA loans can stretch out to 10 years or more.
• Business financials: A significant factor lenders consider is the projected cash flow of the combined business post-acquisition. A strong cash flow projection can lead to a longer repayment term.
  Generally, expect acquisition loan repayment terms to fall between 3 and 10 years.

Can I get a business acquisition loan with bad credit?

It is possible to ask for a business loan even with a bad credit score, although your options will be very limited. Traditional lenders rely heavily on credit scores, so with bad credit, your options narrow down. However, if approved, expect a higher interest rate due to the lender's perceived risk.

How to get a business acquisition loan

Lenders carefully assess several factors before approving a business acquisition loan. They want to see that you possess the skills and experience to manage the acquired business successfully. Your creditworthiness is also taken into account, as it will significantly improve your chances of loan approval and potentially secure a more favorable interest rate.

The lender will thoroughly analyze the financial health of the business being acquired, including its profitability, cash flow, and debt.

A well-defined business plan outlining your acquisition strategy, integration plan, and future growth projections is crucial for demonstrating the viability of the acquisition. 

Most lenders require a down payment, typically from 10% to 25% of the purchase price to demonstrate your financial commitment to the acquisition.

Finally, depending on the loan type, the lender may require collateral to secure the loan, which could be the assets of the acquired business or other valuable holdings.

4 tips to prepare your loan application to buy an existing business

Obtaining a business acquisition loan requires thorough preparation. Here are some steps to follow:

1. Develop a comprehensive business plan

This document should detail your acquisition strategy, including the target business, the rationale for the acquisition, your integration plan, and your financial projections for the combined entity.

2. Gather financial documents

You'll need to provide the lender with your personal and business financial statements, tax returns, and business projections.

3. Choose the right lender

Research different lenders and compare their loan products, interest rates, and eligibility requirements. Consider banks, credit unions, and alternative lenders specializing in business acquisitions.

4. Get professional advice

Consult an experienced business advisor or loan broker who can guide you through the loan application process and help you present a solid case to lenders.

By carefully considering your financing options, thoroughly preparing your application, and demonstrating a sound acquisition strategy, you can increase your chances of securing the funding you need to achieve your business goals.

Due diligence is essential to ensure the target business is a good fit and the financial terms are favorable.

Why is applying for a business acquisition loan a good idea?

There are several reasons why applying for a business acquisition loan can be a good idea for aspiring entrepreneurs. Here are some of them:

• Fast-tracked growth: This is one of the most significant advantages because it allows you to run fast through the initial stages of building a business from the ground up. The acquisition will give you the leverage of already having a customer base, brand reputation, and operational infrastructure. This can significantly accelerate your growth trajectory compared to starting a new venture.
• Reduced risk: Usually, an established business represents a lower risk than venturing into a startup. By acquiring a company with a history of success, you mitigate some of the inherent uncertainties of starting a brand-new business.
• Access to expertise and resources: Acquisitions can provide you with valuable human capital and resources that may not be available or affordable when starting fresh. You may gain access to experienced employees, established supplier relationships, and well-defined processes that contribute to a smoother operational transition.
• Synergy and expansion: Merging your business with a complementary one can create synergies that unlock new growth opportunities. Through combined operations, you may be able to expand your product or service offerings, access new markets, or achieve greater economies of scale.
• Improved positioning: Acquiring a competitor can give you a significant market edge, leading to increased market share, stronger brand recognition, and potentially even greater bargaining power with suppliers.

Qualify for a business acquisition loan

Boopos is here to help you with a designated advisor who will work with you through the whole M&A process. Contact one of our experts today and start your new venture with Boopos!