How do business acquisition loans work?
Business acquisition loans are typically structured as term loans, in which you repay your borrowed funds, with interest, over a set period of time. Loan amounts, interest rates and repayment terms vary by lender.
Although you may ask for a specific loan amount, some lenders will only offer you a percentage of funding — and require that you supply the remaining percentage as a down payment. Down payments on business acquisition loans can be as little as 10% or as much as 30% depending on the type of financing, lender and your business’s qualifications.
Lenders typically rely on a business valuation — an evaluation of the economic value of the company you’re looking to buy — among other factors, when determining the loan amount to offer.
Collateral may also be required to secure your financing. In some cases, tangible assets from the company you’re looking to purchase can serve as collateral on the loan.
Where to get a business acquisition loan
Business acquisition loans are available from a variety of sources, including:
Banks and credit unions
Banks and credit unions can offer acquisition loans with low interest rates and long terms for businesses that can qualify and don’t need cash fast.
To qualify for a business bank loan, you’ll typically need strong personal credit (a score of 700 and up), several years in business and excellent finances. Not all banks or credit unions require physical collateral, but offering this type of security may help you access larger loan amounts and lower interest rates.
However, these small-business loans can be slow to fund and often require lengthy application processes.
SBA loans are issued by participating lenders, usually banks and credit unions, and are partially guaranteed by the U.S. Small Business Administration. These loans have flexible terms, low interest rates and can be used for various types of business acquisitions. However, like traditional bank loans, SBA loans have strict requirements and can be slow to fund.
To qualify for an SBA loan, you’ll typically need strong annual revenue, at least two years in business and a personal credit score of 690 or higher — although some SBA lenders may have lower credit score requirements.
You’ll also likely need to provide a down payment of at least 10% of the total loan amount when using an SBA loan for a business acquisition. In some cases, you may need to provide additional collateral.
Standard SBA 7(a) loans can take anywhere from 30 days to a few months to fund. As an alternative, SBA Express loans offer a faster funding time, but they also have smaller loan amounts and slightly higher interest rates.
If you need funding faster — or don’t qualify for an SBA or bank loan — consider a business acquisition loan from an online lender. Online lenders such as Funding Circle and Credibility Capital offer acquisition loans in amounts up to $500,000 and terms up to seven and five years respectively.
Online lenders generally have less strict requirements compared to banks and credit unions. You may be able to qualify for a business loan with fair credit (a FICO score of 630 to 689), and you may not be required to provide physical collateral. Online lenders may also be more likely to work with less-established businesses, especially if they have strong finances.
And whereas bank and SBA loans may take weeks to fund, online business loans can often be funded in just a few days. Credibility Capital, for example, can offer financing in as fast as three days. Online lenders typically charge higher APRs than traditional lenders — the tradeoff for easier approvals and speed.
Alternative options for business acquisition financing
If you’re looking to buy a business, you may have funding options outside of traditional term loans, such as:
Equipment financing. If your business acquisition includes equipment, you might use an equipment loan to finance part of your purchase. Or if you’re buying a business that relies heavily on equipment, such as a construction business, you may be able to find an equipment loan to cover a majority of the costs. With equipment financing, the equipment itself serves as collateral on the loan.
Seller financing. With seller financing, you’re borrowing the capital you need to purchase the business directly from the current owner. You work with the owner to create an agreement regarding terms and interest and then repay the owner directly. This type of arrangement might be easier than working with a third-party lender, if the seller is willing to offer it.
How to get a business acquisition loan
Every lender has different eligibility requirements, but they typically use similar criteria to underwrite your business for a loan, including your personal credit score, annual revenue and time in business. Lenders also consider your cash flow, ability to repay the debt and the collateral you’re able to offer.
When acquiring an existing business, lenders will consider the value of the company you’re looking to buy, the down payment you can provide, your business plan and financial projections for the acquisition, as well as your experience in the industry.
As part of the application process, you’ll need to provide financial documents like cash flow statements, profit and loss statements, tax returns and business and personal bank statements. The lender will likely ask for additional documentation specifically related to your business acquisition such as:
Financial statements for the business you’re purchasing.
A business plan.
Post-purchase sales projections.
Proof of collateral and/or a down payment.
A business valuation of the company you’re purchasing.
A letter of intent with the terms of sale between you and the current owner of the business.
You might consider working with a business accountant and a business attorney to assist you through this process. These professionals can help you evaluate the costs of purchasing a business, perform a business valuation and draft important documents related to the acquisition.
Compare small-business loans
For a look beyond business acquisition loans, check out NerdWallet’s list of best small-business loans for business owners. Our recommendations are based on the market scope and track record of lenders, the needs of business owners and an analysis of rates and other factors, so you can make the right financing decision.