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How to Get a Business Acquisition Loan to Buy a Business

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What Is a Business Acquisition Loan?

A business acquisition loan is a commercial loan specifically for purchasing an existing business or opening a new franchise. The amount of financing you get with a business acquisition loan will depend on the business you’re buying, while the rate you qualify for depends on your own qualifications.

Here are your options for the best business acquisition loans:

  1. Traditional term loans
  2. SBA 7(a) loans
  3. Startup loans
  4. Equipment financing
Check Your Business Loan Options

4 Best Business Acquisition Loans

There are a lot of business acquisitions in the United States each year—in 2018, there were almost 15,000, according to the Institute of Mergers, Acquisitions, and Alliances.

If you’re looking to join that number of business owners acquiring a business, you might need capital to make the deal happen. That’s where business acquisition loans come in.

While there’s no single specific loan type designed for business acquisitions, there are certainly a few small business loan products that simply fit better for the business acquisitions process than others do.

Below are the four main loan types you’ll want to consider as you seek funding through a business acquisition loan, as well as lenders who offer them.

1. Traditional Term Loans

If you’re looking for business acquisition loans with a fixed interest rate and predictable monthly payments, a traditional term loan will fit you well. It’s the easiest to understand because it’s probably what you naturally think of when you think of a business loan.

The terms are pretty simple for this type of business acquisition loan—you borrow a fixed amount of money, usually for a specifically stated business purpose, and pay back the loan over a fixed term and typically at a fixed interest rate.

Term loans are the most common loan type for business acquisition since they fit in well with the typical cost and the long-term nature of purchasing an existing business.

However, many lenders will have high standards for your business acquisition deal in order to fund your term loan, and you might not qualify on your first try—so prepare for one or several lengthy loan applications to secure a term loan for your business acquisition.

See Your Term Loan Options

2. SBA 7(a) Loans

Contrary to what the name SBA loan suggests, the SBA doesn’t directly lend money to small businesses. Instead, the agency guarantees all or part of those loans, incentivizing lenders to approve more borrowers.

The SBA aims to increase the chances that small businesses will get approved for funding by mitigating some of the risk for the lenders.

This is great news for borrowers hoping to acquire existing businesses, since the SBA would lessen the risk of the deal and make it more likely that lenders would approve business acquisition loans.

Out of the SBA’s various programs, the 7(a) loan program is both the most common and the most appropriate for the business acquisitions process. This program allows small business owners to borrow up to $5 million in funds for working capital, equipment purchases, real estate purchases, and even basic startup costs.

See Your SBA Loan Options

3. Startup Loans

If you’re a relatively new entrepreneur looking to buy an existing business on your own, you’ll probably want to look at a startup loan. These are typically still term loans, but they’re available through specific lenders who won’t expect revenue or credit history from an existing business when they evaluate your finances as the borrower.

While startup loans for business acquisition do exist, they’re difficult to come by and involve intense scrutiny into your personal finances. Additionally, the lender will expect you to put some skin in the game, usually in the form of at least 20% of the purchase price as a down payment.

Here are some options to consider:

CAN Capital

Another short-term lender with low qualification standards is CAN Capital. Through them, you can secure a loan with a value of up to $250,000 and a three- to 24-month term. Factor rates can be as high as 1.48 though, so this financing can be expensive.

You’ll just need $4,500 in annual revenue, a 550 credit score, and at least three months of business history to qualify for a CAN Capital startup loan.

4. Equipment Financing

In some cases, if the majority of the purchase price for the business you’re acquiring is based on the value of equipment being transferred, an equipment loan could be a great source of financing for your business acquisition. A small business equipment loan can be used for virtually any equipment need—from computers to production machinery, to vehicles, and more.

As a point of reference, compare equipment financing to a standard car loan: The amount you can borrow depends on the type of equipment, the price, and whether it’s new or used. The lender also considers the expected life of the equipment and its current condition.

Here are the best lenders for equipment financing:

Balboa Capital

Equipment financing from Balboa Capital can be as much as $1 million on a five-year repayment term. But this loan is not easy to qualify for: Balboa will want to see at least $300,000 in annual business revenue.

On the bright side, you can get funded in as little as three days, and they charge a small origination fee of 2%.

Funding Circle

A lender that does not require a high annual revenue is Funding Circle. Their equipment financing product is available to business owners with a 620 credit score and at least two years of business history on their books.

Through Funding Circle, you can secure equipment financing loan amount between $25,000 and $500,000 with repayment terms up to five years and interest rates starting at 4.99%.

Qualification Standards for a Business Acquisition Loan

Once you’ve determined which type of business loan fits your business acquisition loan needs best, you’ll need to prepare your personal finances, as well as those of any businesses you already own, for review by your lender.

Just like with any small business loan, lenders will carefully scrutinize both your personal financial history and the history of your business to determine whether you’re a strong candidate for a business loan.

Is there an obvious reason why you’re a good fit to own this business? Do you have the talent, contacts, and resources needed to make the business succeed? Does the valuation of the business give you a reasonable opportunity to turn a profit?

Let’s review the main criteria lenders consider when they assess your personal and business finances.

See What You Qualify For
Personal Credit Score

When you apply for a business acquisition loan, you might be surprised to learn that your personal credit score is one of the most important factors in determining your loan eligibility.

Especially if you’re looking for a startup loan to acquire a business, lenders see your credit score as a significant factor in your likelihood of making your loan repayments after taking on business acquisition funding.

From the lender’s point of view, they’re lending money to a small business owner, not just the business itself. So as the to-be business owner, how you handle your personal finances is incredibly significant. (Same goes for business acquisition loans and traditional business loans.)

If your credit score is 700 or above, you’re in great shape, and will likely have excellent small business lending options available to meet your business acquisition needs.

Business Credit Score

If you already own a business, your personal credit score is only the beginning of the evaluation lenders will make into your finances as the borrower.

They’ll also review your business credit score and history as one of many important factors in determining your eligibility for a business acquisition loan.

Your business credit score is determined through five main factors:

  • Payment history
  • Amounts owed
  • Length of credit history
  • Types of credit used
  • Your new credit

Again, payment history is the most significant of these factors, so it’s critical to always make debt payments on time, both personally and for your business.

Tax Returns

Your lender might ask to verify your personal income as well as the revenue of your existing business through your state and federal tax returns. Have your last two to three years of tax returns available when submitting your application—and if you haven’t yet filed tax returns for the current fiscal year, provide your extension paperwork to make it clear that you’re still in good standing with the IRS.

Cash Flow Statement

The cash flow of your existing business acts as a snapshot of its financial health and an indication of whether your existing business can support the debt and the uncertainty of a business acquisition.

If you exhibit positive cash flow, that’s a sign that you’re managing your business finances well, and a strong profit margin gives you the necessary buffer to make payments on your acquisition alone—even if your newly acquired business isn’t immediately profitable.

Almost all lenders agree that an acquisition is not a realistic way to “save” a business facing cash flow issues or operating at a loss, so don’t expect to be approved for a business acquisition loan if your current business is struggling financially.

Outstanding Debts

If your current business has any outstanding debts indicated on your balance sheet or other financial records, this can have a serious impact on your ability to qualify for a business acquisition loan.

Typically, your current outstanding debts will take “first position,” meaning that in the event that your business could not repay all its debts, they would be the first ones to get repaid.

Most lenders don’t like to approve loans in which they won’t be in first position, and this is especially true for business acquisition loans.

Because of the relatively risky nature of acquisitions, it’s in your best interest to settle any outstanding debts in order to have any hope of being approved for a new loan.

Business Valuation

To determine a fair price for your business acquisition (and therefore a smart amount for your loan), your lender might ask for a formal business valuation performed by an independent valuation firm.

Through this process, the consultant will look at both tangible and intangible aspects of the business to determine a monetary value under various scenarios.

When analyzing a business, valuation consultants typically account for all expected profits in the foreseeable future, then discount the future profit projected for each year by the rate of return they expect.

However, there are several outside factors that could impact the valuation of your business.

For example, how essential are the current business owner’s expertise or industry contacts to the business’s success?

Considerations like these could impact how valuable the business would be after an acquisition.

Related Experience

In addition to setting an approximate cost, the lender will consider how your work experience as a business owner will contribute to the future of the business post-acquisition.

Are you experienced in the industry of your desired business?

Will you have the tools you need to make your business succeed?

Do you have any specific skills, expertise, or contacts that make the business likely to succeed more because of your involvement?

Conversely, if you have relatively little experience in the industry of your desired business, that could be seen as a red flag to the lender.

After all, if you don’t have the skill needed to run the business, that initial valuation likely won’t last long.

Business Plan

If you’re looking to purchase an existing business, you should do so with a plan to change operations, pursue a different strategy, or take some measure to improve the existing business’s profitability.

The strategy you take will have a significant impact on the long-term viability of the business, and so on your ability to repay business acquisition loans.

Along with your loan application, you’ll need to submit a detailed business plan for your new business explaining the history of your business’s current strategy, plans you might have to make changes or add value in the future, and a plan for transitioning to your new strategy.

Future Projections

To wrap up your business plan, you’ll want to go back to the numbers and provide some thoroughly researched data-based sales projections for the next two years.

These projections should derive from the business’s historical sales records, while also taking into account your strategy for moving forward.

While it’s okay to be confident here, know that your projections won’t be taken at face value, and will need to be backed up with verifiable data.

And even with the data on your side, lenders will downgrade your projections by about 10% as standard practice.

Value Add

As they review your personal experience, business plan, and future projections, along with the business valuation, lenders will also be looking to answer one, fundamental question:

What value do you add to the business that will make it better and more successful than before you acquired it?

That might be a new strategy, a piece of equipment, a customer base, or any number of tangible or intangible contributions.

If you can provide a strong, provable answer to that question, there’s a good chance that lenders will see your business acquisition as a good, fundable deal.

The Bottom Line

Now that you’re familiar with business acquisition loans—and all the details they entail—it’s time to start thinking next steps.

If you’ve decided that business acquisition financing is the right move for you, then your next step is to simply apply

Check out our guide to getting a loan to buy a business to make sure your next steps are as confident and effective as possible.