How To Do It Right: 3 Misconceptions When Applying For A Business Acquisition Loan
Acquiring an existing business is a fast way to scale up your operations. When you purchase another business or franchise, you inherit their customer base and knowledge of the market. The acquisition may include experienced managers and employees, saving valuable time in recruitment and training. Depending on the business you acquire, expensive equipment, machinery, and inventory may be included.
This article will discuss the types of business acquisition loans and dispel some of the myths you may have heard.
Common Ways To Finance A Business Acquisition
- It’s possible to acquire a business through a 100% cash-based transaction. On rare occasions, a company has sufficient operating cash to buy a business without financing
- Business acquisition loans. The SBA, banks, and alternative lenders offer these types of loans. Therefore, you keep your operating capital free to cover post-accession expenses
- Private equity financing. Financing for buying an existing business can be secured from a private equity firm. Part of the financing arrangement includes equity in your company, which means they become involved in management decisions
- 401(k) rollovers for business start-ups. 401(k) ROBS is a special vehicle created by the IRS that allows you to utilize the funds in your 401(k) account to start a business. The funds in your employer-sponsored 401(k) can be withdrawn to purchase an existing business or franchise, or to launch a new company. This strategy is complex, involves a few stages, and requires the advice and guidance of a financial advisor or tax attorney
What Is A Business Acquisition Loan?
These loans finance the purchase of an existing business or franchise. The loan terms are specific to acquisition only. Loan funds must be used within a short period of time and can’t be used for purposes outside the scope specified in the loan agreement. There are several types of loans available for buying existing companies, such as business expansion loans, equipment financing, SBA loans, and startup loans.
Types Of Business Acquisition Loans
- Long-term loans. One of the most affordable ways to finance your business accession is with a long-term loan. The amount available to be borrowed is suitable for most purchases. The loan is repaid in equal installments over a set term length. There’s less of a burden on your cash flow, freeing up money that can be invested in your new business endeavor
- Short-term loans. Short-term loans offer financing opportunities for small businesses that don’t qualify for SBA or long-term loans. Repayment terms are usually two years or less and come with higher interest rates. They can be secured from online lending platforms and private capital companies
What Are The Benefits Of A Business Acquisition Loan?
As a small business owner, you know the only way to survive is to grow. A business acquisition loanloan provides affordable financing to help you quickly move up to the next level of operations.
- You can buy a business or franchise that already exists
- You gain access to a business that has a track record, name recognition, and a steady customer base
- As an entrepreneur, you have immediate access to a product, prime location, and employees
Misconceptions about business acquisition loans discourage many small business owners from applying. Here are three of the most common myths.
- You need collateral. Collateral isn’t 100% necessary to secure these loans. Many private commercial capital companies and online lenders offer this financing
- You need a long business history. When applying for any type of financing, it improves your standing if you can demonstrate business success. However, lengthy business history isn’t required when applying for these types of loans. Growing through acquisition is one of the proven strategies for expanding market share
- Applications take months to be approved. Banks do take longer to process applications. It’s possible it could be months before you see the funds in your account. However, banks aren’t your only option. Alternative lenders understand the time-sensitive nature of buying an already established company, especially when there are multiple interested parties
Preparation Before Application
What you’ll need from the business you want to buy:
- List of debts and liabilities
- Tax returns
- Financial statements
- Signed Letter of Intent
What the lender will need from you:
- A good business and credit score. Your personal credit score is especially important if you’re seeking startup financing
- Copy of last three year’s business tax returns
- Bank statements
- Balance sheet
- P&L statements
- Cash flow projections
- A business plan that includes a discussion of the strengths of the business to be acquired, such as management team, employees, marketing plans, and financial projections
Where To Get A Business Acquisition Loan
- SBA loans. SBA 7(a) loans up to five million dollars are available for those who want to acquire an already existing company. These loans come with terms between five and 25 years. Interest rates are capped at a set percentage over the prime rate
- Bank loans. The advantage of bank loans is that the loan amounts are more significant, and the interest rate is competitive. Entrepreneurs and small businesses with a shorter history have a more challenging time obtaining financing from this source
- Alternative lenders. Alternative lenders provide loans that are perfect for entrepreneurs and small business owners. The best way to minimize the amount of time you need to spend searching out the best deal is to visit one of the online lending marketplaces
Acquiring an existing business or franchise is one of the fastest ways to launch a new business. There are many aspects to starting a new business that you avoid by acquiring an existing one. For small business owners, buying an established company can help you reach your long-term business goals much more quickly.
However, acquiring a business can be costly. For instance, you might need millions of dollars to purchase an existing franchise. Fortunately, a business acquisition loan will provide you with the financing you need.