Many buyers take out business loans specifically to finance the acquisition of another business.
In this guide, we break down how to get a loan to buy a business in three steps:
When you’re getting a loan to buy a business, the process will be a little different than applying for other types of business financing. Before you really can get started, it’s important to evaluate your qualifications as a business and understand what lenders are looking for in your loan application.
Lenders are offering a large amount of money for a big business endeavor, so they’ll spend significant time evaluating your business, your personal management experience, the details of the business you’re buying, and so on.
Let’s take a look at the different business loan requirements lenders will be taking into consideration when you apply for financing to buy a business.
Especially if you’re looking for a startup loan to acquire a business, lenders see your personal 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.
If you already own a business, lenders will also review your business credit score.
Your business credit score is determined through five main factors:
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.
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.
Getting a small business loan to buy a business also might require a down payment. This could be a one-time payment of anywhere between 10% to 30% of the value of the business you’re buying.
When looking at your cash flow, a lender offering a business purchase loan will want to see that you have enough liquid cash to make a significant down payment and still have enough cash on hand to make your loan payments each month.
Business acquisition loans that require no collateral might be possible, as the business you’re purchasing acts as collateral (or, the lender will put a lien on the business you’re purchasing).
On the other hand, the lender may require that you put up some other form of personal or business collateral, beyond the assets included in the new business you’re purchasing.
To understand what collateral you have to offer, you may submit an appraisal of your fixed assets. Or, you might simply use your balance sheet to give a lender a sense of your capacity to offer valuable fixed assets as collateral.
The more fixed assets you have on your balance sheet, the easier time you’ll have getting a loan to buy a business.
Along with other pieces of your business loan application, you’ll want 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.
With this business plan, you’ll want to be sure to include future financial projections—providing 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.
In addition to your business financials and plan, the lender will consider how your work experience as a business owner will contribute to the future of the business post-acquisition. If you have relatively little experience in the industry of your desired business, that could be seen as a red flag to the lender.
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, as well as outside factors, to determine a monetary value under various scenarios.
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.
You’ll likely have to provide your bank statements, income statements, and business and personal tax returns to prove the revenue (and sources of revenue) for your business. You’ll also have to provide the same information (or as much as you can) for the business you’re buying.
In addition, it’s also likely that you’ll need to provide a current business debt schedule, if you have one, as your outstanding debts can have a serious impact on your ability to qualify for a business acquisition loan.
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.
Next, you’ll want to determine which type of small business loan is best for your needs.
Although there’s no single specific loan type designed for business acquisitions, there are certainly a few financing products that simply fit better for the business acquisitions process than others do.
|Loan Type||Best for:|
Traditional term loans
Highly qualified borrowers looking for lowest interest rates and longest terms
Strong borrowers who can’t qualify for traditional bank loans
Online term loans
Borrowers who can’t qualify for bank or SBA loans; those who need faster funding; startups looking for a loan to buy a business
Affordable, flexible financing option for businesses struggling to get other types of acquisition loans
Borrowers purchasing businesses with valuable equipment; faster funding with more flexible requirements than other options
If you’re looking for business acquisition loans with a fixed interest rate and predictable monthly payments, a traditional business 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, bank 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 (or at all)—so prepare for one or several lengthy loan applications to secure a term loan for your business acquisition.
If you don’t qualify for a bank term loan, SBA loans will be your next best option for low interest rates and long terms.
These business acquisition loans are slightly easier to qualify for than bank loans, as the SBA’s partial guarantee means the bank lender takes on less risk when working with you.
The SBA offers two loan programs that are suitable for business acquisitions: the 7(a) loan program and the CDC/504 loan program.
The CDC/504 loan program is meant specifically for major fixed asset purchases—which encompasses a business acquisition. It’s a very specific type of financing, and generally a more complicated process that’s harder to qualify for.
SBA 7(a) loans, on the other hand, are the more traditional and common SBA financing option, and one that might be suited for a smaller business acquisition.
In either case, these loans will offer long terms (up to 25 years), low interest rates (generally about 6% to 8%), and large loan amounts (up to $5 million).
It’s important to remember that although SBA loans are easier to qualify for than bank loans, you’ll still need to meet top requirements. Plus, like bank loans, SBA loans are slow to fund—taking anywhere from a few weeks to a month or more.
If you need funding faster, can’t qualify for a bank or SBA loan, or you’re a new entrepreneur looking to buy an existing business, online term loans might be the best option for you.
Online medium-term loans from alternative lenders will be easier to qualify for than bank or SBA loans (and faster to fund), but they’ll still be able to offer the funding you need to buy a business.
Compared to other types of online loans, medium-term loans typically have terms of 12 months or longer, with loan amounts up to $1 million. Although the interest rates with these loans will likely be higher than with a bank or SBA loan, you can still find relatively low rates, especially if you have strong qualifications.
If you’re a startup looking for a loan to buy a business, your choices will be more limited; however, you may find luck with lenders like CAN Capital or BlueVine, which have flexible time in business requirements. These products will typically have higher interest rates and shorter terms.
Seller financing essentially works as it sounds: instead of getting financing from the bank or another third-party lender, you’re getting a loan from the seller of the business itself.
The seller takes part of the business’s purchase price in cash, and the remainder in the form of a promissory note that you, as the buyer, will pay back with interest over a period of time—typically three to five years.
Seller financing is often used in conjunction with traditional commercial lending as the funds don’t usually cover the entire cost of buying a business.
All in all, seller financing is a great option if you can’t qualify for other types of business acquisition loans, especially since rates and terms are typically competitive with other financing products. Of course, for this type of funding to be a viable option, the owner of the business you’re purchasing will have to be willing to offer it.
If the majority of the purchase price for the business you’re acquiring is based on the value of the 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.
Using equipment financing as a business acquisition loan can also be great for accessing funding quickly, with fewer application requirements. With this type of funding, many lenders will look at the value of the equipment first and foremost, and therefore, will offer more flexibility for businesses that don’t necessarily meet traditional requirements.
In this way, equipment financing is often worthwhile for newer businesses, as well as those with average credit.
Once you’ve determined the right product for your business and where you’d like to apply, you’ll want to gather all of the materials necessary for your application. In general, you can expect to provide some if not all of the following:
Once you’ve gathered all of the required documentation, you’ll be able to fill out, complete, and submit your application.
As you go through the underwriting process, ensure that you respond to the lender’s request for more information or clarifications promptly and accurately—this will increase your chances for approval, as well as speed up the loan timeline.
After you’ve gone through the underwriting process, you’ll (hopefully) receive an offer from one or more lenders. Before you accept any offer, you’ll want to be sure to review the business loan agreement thoroughly, ask any questions you have, and even review it with a business advisor or attorney.
Moreover, if you have multiple offers, compare them to find the most affordable option for your business.
Once you’ve decided which loan is best for your needs, you’ll sign the loan agreement and proceed with the closing process. Depending on the lender and product, you’ll receive the funds in your bank account within a few days.