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Acquiring an existing company can help you expand your business or even launch a career as an entrepreneur without having to start from scratch. A loan that helps you buy a preexisting business or franchise (or buy out partners of your current business) is called a business acquisition loan.
Keep reading to learn more on business acquisition loans, common uses for a business acquisition loan, tips for getting a business acquisition loan, and more.
Key Points
• Business acquisition loans provide funding for entrepreneurs or companies looking to buy an existing business or franchise, offering a pathway to growth or entry into a new market.
• Options include SBA loans, traditional term loans, equipment loans, and seller financing, each with unique terms and eligibility requirements.
• Lenders typically assess the borrower’s credit score, financial history, and the profitability of the target business when determining loan eligibility.
• Acquisition loans allow buyers to preserve cash flow, access capital quickly, and secure ownership without fully liquidating personal savings or assets.
• Borrowers should evaluate the loan’s interest rates, repayment terms, and fees to ensure the acquisition is financially viable and aligns with long-term business goals.
What Is a Business Acquisition Loan?
A business acquisition loan is a type of small business financing that’s used to acquire a franchise or preexisting business. Like any kind of funding, a business acquisition loan involves risk, even if you’re aiming to buy a company that’s already successful.
If the acquisition makes sense for you or your current company, financing the arrangement with a business acquisition loan can speed up the process of starting your new venture. Make the best decision for your situation by learning how business acquisition loans work and what you’ll need to apply for one.
Do Business Acquisition Loans Work?
With a business acquisition loan, a bank, credit union, or online lender loans money to a small business so that it can purchase a new business, buy a franchise, or expand its current business.
The lender will have basic requirements that must be met, such as a minimum credit score, minimum annual revenue, and minimum length of time in business. The exact requirements will vary, so it’s always best to shop around to find the right loan and lender for your situation.
Business acquisition loans come with set terms, which you’ll see detailed in writing before you sign. Make sure you can afford the monthly payment so you don’t risk defaulting on the loan. Once you receive the loan, you’ll typically start making payments to the lender the following month.
Common Uses for a Business Acquisition Loan
Taking out a business acquisition loan allows a borrower to finance the purchase of an existing business or expand their current one. An acquisition loan can be used to:
• Obtain a standalone business
• Purchase a franchise
• Buy out partners in your current business
While requirements vary by lender and situation, both new entrepreneurs and existing business owners can usually find options to apply for.
Recommended: Startup Business Loans
4 Types of Small Business Acquisition Loans
There are numerous types of business loans, many of which are well-suited to people wanting to acquire a business. If you’re wondering how to finance a business purchase, start by exploring your options thoroughly to see which requirements you meet and what structure makes the most sense for your needs. There are four common types of business acquisition loans to consider.
1. SBA 7(a) Business Acquisition Loan
There are a wide range of loans offered by the U.S. Small Business Administration (SBA), including the SBA 7(a) loan. While the SBA 7(a) loan isn’t issued solely for the purpose of acquisition, the funds can be used toward the purchase of a new business.
With an SBA 7(a) loan, you can borrow up to $5 million, but typically you’ll need to make a 10% down payment. A personal guarantee is generally required from anyone who owns more than 20% of the business. In order to qualify for an SBA 7(a) loan, you’ll usually need a good credit score and enough cash flow to keep up with the loan payments.
The SBA doesn’t lend directly to business owners. Instead, applicants must apply with a lender that specializes in SBA loans. These may include banks, credit unions, and certain online lenders. Each lender will have its own approval requirements, so you can still compare lending options even if they’re providing the same type of loan.
2. Online Lenders
Online business acquisition lenders often have less stringent approval criteria than traditional bank lenders. And they may offer more funding options, too.
Online lenders have different requirements of applicants, including length of time in business, minimum credit score, and annual revenue.
Online business lenders have a reputation for much faster funding times compared to banks and credit unions. Preapproval is generally swift once you’ve submitted all of your documentation, and funds could arrive in your bank account within a few days. These conveniences can, however, come with rates that are typically higher than those seen at traditional banks.
Recommended: Small Business Line of Credit
3. Seller Financing
Though it depends upon the specific situation of the business you want to acquire, in some cases, you may be able to arrange for seller financing, also known as owner financing. Essentially, this means that you’re getting the loan from the seller and making your monthly payments to that former owner.
Seller financing might appeal to a business owner who’s retiring, for example, but still interested in a passive income stream. In cases like these, the loan terms could potentially be quite flexible since you’re making financing arrangements with an individual rather than a financial institution.
You’ll likely need a large down payment (up to 50% of the purchase price) to make it more appealing to the seller to finance the rest of the deal. Then, you’ll need to agree on other terms, including the interest rate and repayment period. These details are outlined in the loan promissory note, which you can have drawn up by a lawyer, as it’s legally binding.
4. Equipment Financing
Businesses that rely heavily on equipment may sometimes use equipment financing to fund their purchases. In order for this to be an option, the bulk of the business’s value should be in the equipment. A construction firm may rely on its bulldozers and other heavy machinery, for example, or an accounting firm may depend on its computer systems.
Because the equipment of the business you’re acquiring is used as collateral, an equipment loan can help reduce the immediate cost of the acquisition. You may also be able to avoid making a down payment, depending on the lender.
Pros and Cons of a Business Acquisition Loan
Like any other business loan, a business acquisition loan comes with both advantages and disadvantages.
Pros of a Business Acquisition Loan
One of the primary benefits of a business acquisition loan is the ability to secure ownership without depleting personal savings, which helps maintain liquidity for other needs. Additionally, lenders often offer competitive interest rates, especially through SBA loans, making these loans more affordable than alternative financing options. The loan also provides the opportunity to acquire a business with an established customer base, reducing the risk compared to starting a business from scratch.
Pros:
• Maintains personal savings and liquidity
• Access to competitive interest rates
• Easier entry into an established business with existing revenue
Cons of Business Acquisition Loans
One of the biggest drawbacks of obtaining a business acquisition loan is that it can be a lengthy process, requiring detailed financial records and a solid credit history. Borrowers may also face high upfront costs, including down payments and origination fees. Furthermore, repayment obligations could strain cash flow, particularly if the acquired business doesn’t perform as expected.
Cons:
• Lengthy and rigorous application process
• High upfront costs, including a down payment
• Potential cash flow challenges if the business underperforms
Business Acquisition Loan Requirements
Applying for a business acquisition loan typically requires more work than other types of business loans. You’ll need to provide information about your finances and the business you want to purchase.
What lenders want can vary, but there are some general requirements and documentation you may need when you’re applying for a business acquisition loan, including:
• A fair-to-good personal credit score
• Personal and business bank statements and tax returns
• Business financial statements and a business plan
• Proof of down payment and/or collateral
Additionally, you’ll likely need to supply some details about the acquisition and the business itself, such as:
• A letter of intent outlining the terms of the acquisition
• Company valuation
Recommended: Working Capital Line of Credit
Tips for Getting a Business Acquisition Loan
In order to qualify for a business acquisition loan, you’ll want to make sure your business is established, your credit is in good standing, and you have decent annual revenues. While minimum credit scores and annual revenue amounts will vary by lender and type of loan, typically the better these two numbers are, the better the interest rate and terms you’ll receive.
If you’re a startup or have bad credit, it may still be possible to get a business acquisition loan. Here are two things you can do that may help increase your odds of approval.
Offer a Down Payment
One option is to offer a large down payment along with collateral or a personal guarantee. You may find a lender willing to accept just one of these additions or you may need to extend all three in order to get approved. The risk, of course, is that you could lose your personal assets if you default on the loan, so it’s crucial to weigh that risk against the potential for return.
Build Your Credit Scores
If you can, it’s also a good idea to look for ways to build your credit score before applying for a loan. Make all of your payments on time each month, pay down excessive debt, and check for errors on each of your credit reports.
Recommended: Business Expansion Loans
The Takeaway
Skipping the bootstrap phase and diving right into running an existing company is an attractive option for many entrepreneurs. A business acquisition loan makes this possible, whether you’re extending your existing company’s footprint, purchasing a franchise, or simply starting off your entrepreneurial career with a company that’s already gotten off the ground.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How do you get a business acquisition loan?
There are several potential funding options for business acquisition loans, including SBA 7(a) loans, equipment financing, seller financing, and small business loans from online lenders. To get a business acquisition loan, first decide which type of loan would be right for your needs. Then, shop around and consider different kinds of lenders — including banks, credit unions, and online lenders — to find the best rate and terms. Once you’ve narrowed your search, you can submit a full application to your lender of choice.
What is an acquisition loan?
An acquisition loan allows you to borrow money in order to purchase a business that is already established. It can be used to purchase a franchise, buy out partners in your own company, expand your company’s footprint, or simply jumpstart the process of developing a business. Once you’ve taken out the loan, payments usually come due regularly and include principal and interest. Collateral is often required to qualify for an acquisition loan.
How much money can you borrow to buy a business?
The amount you can borrow to buy a business depends on the lender, your creditworthiness, and the business’s value. Loans typically range from about $5,000 to several million dollars. U.S. Small Business Administration (SBA) loans can finance up to $5 million, while private lenders may offer more for larger acquisitions.
Can I use an SBA loan to buy a business?
Yes, SBA loans come with flexible options that let you use the funds to buy a business. The SBA 7(a) loan has minimal restrictions on what the funds can be used for. Terms can last up to 25 years, and, while interest rates depend in part on your application, they are generally competitive.
How do you get funding for an acquisition?
To fund a business acquisition, a business can use its own savings or company funds, it can offer bonds or equity to investors, or it can apply for a loan, such as a small business term loan, an SBA loan, or a secured business loan.
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