A majority of businesses are taking advantage of the COVID-19 pandemic and looking for opportunities to buy other businesses for discounted prices. According to research, buyer confidence soared in 2020, while seller confidence plummeted with owners pinning the lower value on the pandemic.
Of course, the “essential” businesses that have proven to be pandemic proof have become golden and hence more expensive. Regardless of the kind of business you’re looking to acquire, chances are, you don’t have that kind of cash just lying around. What you need is a business acquisition loan.
There are many types of business acquisition loans available in the market. So, if you have your eye on a promising business, here’s how you can get a loan to make the acquisition possible. This guide explores everything you need to know about business acquisition loans and how to get the best one.
1. Evaluate Whether You Qualify for an Acquisition Loan
Loans to buy a business are harder to qualify for compared to traditional business loans and it’s for good reasons. Companies get into million-dollar and even billion-dollar merger and acquisition deals. Even though you may not need millions, you still need a hefty amount, so the qualifications are bound to be high.
Start by evaluating those qualifications and research what business acquisition loan lenders look for in borrowers. Expect an extensive process ahead because buying another business is not only a significant undertaking but a risky one as well.
The lenders will scrutinize you and your business, which will take a considerable amount of time. That said, let’s take a dive into all the qualifications the lenders will look for.
2. Your Business Credit Score
Taking a business acquisition loan means that someone will take a chance on you, and you need to prove that it’s a risk worth taking. One of the most important things lenders will be looking at is your business credit history. Your business credit score and credit history are important factors that lenders will look for when determining your eligibility for getting business acquisition loans.
They will scrutinize several important factors. These include payment history, length of credit history, the amount you owe, type of credit used, as well as your new credit. Payment history is by far the most important factor.They have to determine whether you can be trusted to make timely payments for the loan you acquire. They may also look at your personal credit history.
3. Your Business Cash Flow
Your business cash flow has everything to do with your ability to offer a down payment. Some lenders may require that you deposit a down payment that could be as much as 30% of the value of the business you’re about to acquire.
The lender will look at your financial statements to see that you already have enough liquid cash to make the down payment. You must have the ability to generate more in the near future to start making monthly payments on the loan.
According to most lenders, acquiring a business is not necessarily a way to save an existing business that’s failing due to cash-flow issues. Acquiring a business may not save your current business if you are already operating at a loss. This essentially means that if you have cash flow problems, it may be challenging for you to qualify for a business acquisition loan.
4. Collateral
The next thing lenders will look at is the kind of collateral you will offer against the loan. In some cases, the business you’re about to acquire could act as collateral for the loan, and the lender could also put a lien on it.
However, it’s not always guaranteed that the lender will agree to this.
They may require that you have a different form of collateral, whether personal or business collateral that does not correlate to the new business you’re about to acquire. The more collateral you offer, the less risk the lenders will have to work with, and the easier it may be for you to acquire the business acquisition financing.
You may need to get an appraisal for any fixed assets you have. Of course, you can also choose to use a balance sheet that notifies the lender what capacity you would offer as collateral.
5. Your Business Plan
Given that you’re looking to transition into a new business plan to accommodate two businesses, business acquisition loan lenders will want to see a detailed business plan.
It’s important that you include everything like future financial projections such as sales projections for the next few years. These predictions need to be backed up by verifiable data. You need to be aware that lenders will downgrade them by 10% when assessing the plan.
6. Your Experience and Business Valuation
Lenders will consider your overall experience as a business person, and how you will contribute to the business you’re acquiring. Are you experienced in that industry?
Do you have the right knowledge, skills, and expertise to make it flourish? Minimal to no experience could make it seem as if you’re not suitable for that business.
Apart from experience, business valuation is one of the most important factors to consider before giving out business acquisition loans. The lender may ask you to get a formal evaluation from an independent evaluation company to determine the value of the business.
Beyond that, they will also ask for additional financial information. This information includes your bank and income statements, business tax return, and current outstanding debts.
7. Choosing the Best Types of Loan
Whether you are buying an existing business or funding on a startup, there’s no loan specifically designed for business acquisition. So you can explore different types of business loans and see what works for you. The kind of loan you get highly depends on your qualifications, so let’s explore these options.
Traditional term loans are some of the most suitable options for a business acquisition loan because they accrue fixed interest rates. Even better, you get predictable monthly payments over a specified period. SBA Loans are the next best option for those who cannot qualify for bank term loans and need low-interest rates.
SBA Loans tend to be easier to qualify for, and you can get one or two options: the 7 (a) loan program and the CDC/504 loan program. The latter is actually meant for major asset purchases, which includes business acquisition. However, this kind of loan is generally quite hard to qualify for. And the process may be a little complicated than most.
On the other hand, the former is the traditional SBA financing option, suitable for a small business acquisition. The best things about these loans are that they offer low-interest rates. Also you can get large amounts of up to $5 million. The downside of these loans is that they’re mostly slow to fund, and it could take a few weeks if not months.
You can also go for seller financing, but you may still have to get a traditional loan because it may not be enough. If that’s not an option, consider getting equipment financing. An equipment loan can be a good financing option for business acquisition, especially for a small business that doesn’t need a large amount of money.
8. Completing the Process
With so many business acquisition loans available, you need to consider all factors and scrutinize the best option for your business acquisition endeavor. Once you choose the best option, gather all the documents necessary for the loan application, and start the application process. Research the best banks or lenders to get the loans from and choose depending on requirements, charges, interest rates, and all fees involved.
9. Closing the Deal
Once you’re done with the application and submission process, you need to close the deal. Complete the underwriting process by responding to what the lenders ask for in terms of clarifications and more information about your application. This may increase the chances of being approved for the business acquisition loan.
It’s may also speed up the process and get you the loan faster than anticipated. As soon as you’re done with the underwriting process, you’ll receive offers from the lenders. One of the most vital aspects of acquiring a loan is reviewing the business loan agreement.
Don’t be afraid to ask any question involving the contract. If possible, have an attorney or an advisor go through it to make sure you understand all terms and conditions. It’s also possible that you may receive multiple offers from different lenders.
In this case, it’s important for you to compare all those options and gauge which one has the best offer. Depending on the lender of choice, you may have the money transferred to your bank account in just a few days.
Getting the Best Business Acquisition Loans: How we can help
Qualifying for the best business acquisition loans may seem like a daunting process. And for the most part, it’s not easy. However, with this information, it will get a bit easier for you to consider various factors. And find the best loan from the best lenders. Take one step at a time to ensure you don’t make any mistakes in the process. Especially, saddling yourself with high-interest rates that could cost both businesses.
If you’re currently looking to compare possible loan options for a business acquisition deal you want to close; please get in touch with us. We have various loan options that you may qualify for, and we’ll be more than glad to accommodate you.
