All you need to know about Business Acquisition Loans

What is a Business Acquisition Loan?

A business acquisition loan is a way to finance the purchasing of another company which may or may not be operating in the same sector as your current business, but may well be complementary to it. It may even be a direct competitor. Generally, it’s advisable to use a loan like this to acquire a company that is already thriving. This is both because buying successful companies makes financial sense and the lender may well need to see proof that your proposed acquisition is already a thriving enterprise. As well as company acquisition, these types of loans can also be used to buy into a successful franchise if this is a preferred alternative to a small business acquisition.

How Business Acquisition Loans Work

When you are interested in a business or startup acquisition, the first step is to agree exactly how much the cost will be. Next, it’s a matter of working out what percentage of the cost you can afford to pay from your company’s capital and how much you will need to borrow to complete the purchase. Once this figure has been established, it’s a question of raising the money for your loan which may be through an SBA online business loan - which has the advantage of being Government-guaranteed, or a standard term loan from a bank or other financial institution. Then it’s simply a question of meeting the repayments over the agreed term of the loan until such a time as it’s been completely repaid.

How to Apply for a Business Acquisition Loan

Applying for a business acquisition loan is quite a simple process but will need a considerable amount of background information to be provided. Many owners find that one of the easiest ways to apply is by arranging an online business loan, as much of this can be carried out at their own convenience. Below is a list of the most common requirements for the information needed by lenders before agreeing to help with a new business acquisition.

Personal Credit Score

The principal person who is applying for the business acquisition will need to undergo a credit check to assess their personal credit score. Generally this will need to be well over 600 and the higher that it is, the more competitive the interest rate that is applied to the loan may be.

Business Plan

The purpose of most small business mergers and acquisitions is to turn the purchasing business into a more profitable enterprise - and the lender will want to see how this is going to be achieved. This means creating a sound business plan to show what the projected results of making the acquisition will be.

Future Projections

There will have to be evidence-based projections of what the acquisition will do for the company giving facts and figures, covering everything from projected turnover to planned staffing numbers, as well as the overheads that the business expects to experience going forward. These projections may need to cover the whole period of the loan term and possibly even longer.

Added Value

The purpose of buying another business, in most cases, is to make the existing one stronger and with greater potential for success. This added value that will result from securing business acquisition financing and the subsequent purchase will need to be outlined in quite some detail.

Business Credit Score

As well as the personal credit scoring mentioned above, there will also be a need for the business credit score to be above a certain level if the application is to be successful. So businesses who have been delinquent in payment to suppliers or lenders may well find it hard to secure a business acquisition loan.

Current and past business finances

To be successful in getting a loan, a business will need to be able to produce records of current and past business finances that may have to go as far back as five years. These will need to show signs of steady growth and overall profitability, as well as revealing that the business has no major debtors.

Types of Business Acquisition Loans

There are a number of different types of business acquisition financing which may be suitable, depending on requirements and circumstances, including the ones listed here.

Traditional Term Loans

The traditional term loan is one in which a business borrows the funds needed from a bank or other financial institution and repays them monthly over an agreed period of time, generally at an agreed interest rate. This type of loan offers the flexibility of arranging relatively long payment terms.

SBA 7(a) Loans

These are bank-issued loans which have been specifically introduced to help small businesses to grow and which have the advantage of being Government-backed. However, they will require a deposit of between 10% and 30% to secure one and, along with other business acquisition loans, are mainly for companies with a sound financial background.

Startup loans

These are less commonly used for business acquisition because, by their definition, they are intended for businesses that are not yet established. They work in much the same way as the standard term loan and are generally from lenders who are prepared to back businesses with little or no credit history or a track record of success.

Equipment Financing

In some cases a business acquisition’s purpose is to buy the equipment that comes with the sale. In this case, an equipment financing loan might be a better option. It involves borrowing against the value of the equipment, with the equipment becoming collateral for the loan.

The Tough Side of a Business Acquisition

While small business acquisition seems like a very good idea in principle, there are a number of considerations that need to be taken into account beyond exactly how it’s going to be financed. Bringing any two businesses together is always going to present challenges, for example, it may be that some roles are duplicated which means tough decisions will need to be made. There may also be different cultures and ways of working that need to be brought together – so securing the business acquisition financing may turn out to be one of the easiest elements of the process.

Evaluating the Acquired Business

Before deciding to acquire any business, whatever the size, there are always going to be many stages of due diligence to carry out. This will help to confirm whether or not the business is sound and how beneficial the acquisition will be. There are three key areas that need to be scrutinized.

Balance Sheet

The first, and most important, is the balance sheet. This will give a fair and objective view of how strong the business is and reveal any hidden debts or other undisclosed financial commitments.

Business Tax Returns

Two to three years of tax returns will also be required to give an overall picture of how the business to be acquired has fared in the recent past. Ideally, these will show a consistent level of income over the years submitted.

Profit Margin

Even for businesses with a very impressive annual turnover, it’s the profit margin that is the most significant figure. Naturally, the higher it is the better the prospects are after the acquisition.

Business Acquisition Loans with Bad Credit

Lenders naturally prefer to deal with businesses with a good track record. But this is not to exclude the possibility of getting business acquisition loans with bad credit. It may be necessary to put down more collateral and it will almost certainly mean a higher interest rate. By putting together a sound business case and aiming to acquire the right company, means that getting a loan will not be out of the question.

My Conclusion

Acquiring an existing business can be a sound move for many companies; helping them to expand and become more successful far more quickly than simply going for growth. Provided the right acquisition is targeted and a sound case is put together, then getting a business loan should be possible. There are a number of different kinds of small business loans available, so it is simply a case of doing some research and applying for the most appropriate one. The simplest way of applying is generally to take out an online business acquisition loan from one of the many lenders who provide them.