Opening or owning a small business is a goal for many people, but having the cash to purchase an existing business can be a hurdle. A business acquisition loan can be a good option to get you over that challenge and help you achieve your business goals.
What is a business acquisition loan?
A business acquisition loan is a form of financing dedicated to buying a business. Unlike other kinds of bank loans, you’ll need to prove to the lender that you have the experience necessary to successfully run and grow the business so that you’ll be able to pay off your loan. Often business acquisition loans also require a down payment to demonstrate your commitment to the business.
Some banks might also require you to have a steady personal income outside of the business and a good credit score.
How do you finance a business acquisition?
There are several ways to finance the purchase of a business.
Of course, the most straightforward option is to purchase the business using money you’ve saved. For many people, though, amassing the amount of cash needed to buy a business isn’t practical. Most businesses are purchased with some financing.
Sometimes, the financing comes from a seller. The idea is that the seller of a business helps a new owner finance the purchase of the business, then the previous owner is slowly paid back over the course of the loan. This can help a seller find a purchaser for their business more easily and keep some money from the business coming to them even after they’ve sold it.
This type of financing is usually offered at a good rate, and it helps ensure that a seller is completely honest about the financial standing of the business. After all, they won’t get paid back if the business isn’t set up for success.
Another form of financing is a Small Business Association (SBA) loan. SBA loans offer competitive rates because lenders feel more comfortable with this type of financing because it comes with government backing. On the other hand, the SBA loan application process can be long and requires a lot of financial information from the buyer.
You might also consider a regular bank loan. This is one of the less common forms of financing, however, because it doesn’t offer a bank any form of collateral against the loan and banks are often reluctant to loan money without any backing.
Leveraged Buyouts and Assumption of Debt
Two more complex forms of business acquisition loans include, leveraged buyouts and the assumption of debt loans.
In a leveraged buyout, the purchaser borrows against the value of the assets of a business, which can including things like equipment and real estate.
Assumption of debt financing reassigns debt the business may have to the buyer as a part of a financing deal.
Lastly, some new business owners today are using crowdfunding or Peer to Peer (P2P) to finance their purchase of a business. Often, crowdfunding campaigns are for a community-minded or innovative product or service which drives people to contribute.
Campaigns typically come with a reward for contributions, like an early edition of the product or more exclusive offers for larger contributors. The benefit of this kind of financing is that it often comes with customers ready to purchase a product or service. The downside can be that business owners can struggle to get something up and running even after a crowdfunding campaign, making fulfilling on the campaign “rewards” challenging.
Small business owner and CEO, Elad Burko, is the founder of Paperwallet, a line of wallets and bags made to be minimalistic, yet functional. Burko had no experience with crowdfunding until a few years ago when he first used Kickstarter to raise funds for a new collection. The crowdfunding campaign exceeded their goal, so they’ve done two more successful rounds of campaigns since then.
“Our most recent campaign for our Micro Wallet started with a goal of $15,000. We finished with $609,659 raised on Indiegogo plus an additional $344,733 from Kickstarter,” said Burko in an interview.
He added, “It's not a method of funding a business that will work for everyone, but it's a great opportunity to prove the viability of your product and the market value of what you're creating to see if it resonates with your key audiences, or if some iteration is needed to really make it land.”
Often, new business owners combine at least one or more of the above forms of financing to purchase a business, so keep that idea in mind when considering the value of a business and the price you’ll ultimately pay for the asset.
A typical financing plan for purchasing a $750,000 fast food franchise might include:
- $400,000 in a SBA loan
- $250,000 in seller financing
- $100,000 in personal assets combined with a low-interest cash loan from a silent partner
How do you get a loan to invest in a business?
Financial information lenders will want to see from you is your personal credit score, the amount of liquid cash you have to support the business, and the amount of down payment you’ve gathered for your loan. Down payments can be between 10 and 30 percent of the total amount of business financing.
Banks will also consider any collateral you have against the loan. As mentioned above, this can include assets like real estate and equipment, as well as existing inventory. Lenders will also want to see a business plan and know if you have any experience in the field that the business is a part of.
Lastly, a lender will want to look at the financial information of the existing business you’d like to buy. They’ll want to know what assets and debts the business has, what it’s annual and projected profits are, and they’ll take into account any factors that could impact those numbers if the business is sold. For example, does the current business owner have a lifetime of customers that might leave if another owner they don’t know comes in?
How much financing can you receive with a business acquisition loan?
Business acquisition loans are typically available in amounts as low as $5,000. SBA loans are available for as much as five million dollars.
An important number to keep in mind when considering a business loan, however, is that the typical lender will finance between 10% and 30% of a businesses annual revenue. This ensures that you’ll be able to pay back the loan and have enough working capital for the business to be healthy.
Finding the Best Business Acquisition Loan for You
Like other loans, when considering business acquisition funding you’ll likely want to research your options to find the best and lowest loan rate with repayment terms that work well for you. Keep in mind that a longer repayment term can often cost you more in interest payments, even if the rate is low, because you’ll be pay that rate for a longer period of time.
How to Apply for a Business Acquisition Loan
Once you’ve decided the type of financing you want to seek, getting the financing together will depend on how you choose to structure your purchase financing. Then you’ll need to gather your financial information and the financial information of the business you’d like to purchase and share that information with a lender to determine what amount of financing you qualify for and at what rate. Then, it’s a matter of accepting the terms and signing the paperwork to become the owner and operator of your business.