Small business loans can serve a variety of needs, from purchasing equipment to providing working capital for day to day expenses. A business acquisition loan is a small business loan that’s designed for financing the purchase of an existing business or franchise. If you own a business with one or more partners, you could also use this type of loan to finance a partnership buyout.

The amount you can borrow varies by lender, as do the requirements to qualify for a business acquisition loan. Compared to other types of loans, acquisition loans may have more stringent criteria you’ll need to meet for approval.

• The benefits of a business acquisition loan
• If you’re looking for a loan to buy a business, this one is tailor-made for you. A business acquisition loan helps you zero-in on the benefits of purchasing an existing business or franchise rather than going the startup route—all with terms and rates specifically designed to meet your needs.
• Why should you buy a business?
• The startup phase of any business can be pretty backbreaking. Skipping to the “established business” phase can save you a headache and give you a leg up in small business. Buying an existing business or franchise enables you to hit the ground running and leverage existing resources to accelerate your growth—which often means you can go further, faster.
• How much money can you borrow to buy a business?
• Business acquisition loan amounts range from $5,000 all the way up to $5,000,000.

For most small business loans, a lender will review factors like your credit history, time in business, and revenue to determine if you qualify. If you’re buying a business or franchise, your lender will look at slightly different criteria to ensure that you’re investing in a viable business, and in turn, will be able to repay the loan.

Be prepared for these specific application requirements for a business acquisition loan.

• Records of the business’s financial performance and valuation
• Business plan
• Financial projections
• Any related experience that will help you successfully manage and grow the business

Our 15-minute online application gives you access to Lendio’s network of 75+ lenders. That averages out to 12 seconds spent applying to each lender, making it ideal for a time-saving genius like you.

If you don’t have all your paperwork ready, don’t worry. You can start exploring business acquisition loans today and your funding manager will help you fill in any gaps.

• Keep costs down with a low interest rate
• As if a business acquisition loan didn’t make buying a business easy enough, the rates can make the deal even sweeter. If you meet the qualifications, you can receive an interest rate as low as 5.5%, which means you’ll save a bundle of cash over the lifetime of your loan.

• What are the types of business acquisition funding
• There are four specific financing options you could use to acquire a business: Small Business Administration (SBA) loans, term loans, startup loans and a Rollover for Business Startups (ROBS). Understanding how they compare can help you narrow down which type of loan is the best fit for your situation.
• Small Business Administration loans
• The SBA is not a direct lender. Instead, this government agency partners with banks and lenders to secure loans granted to business owners.
• There are several SBA programs available to business owners but 7(a) loans are typically best suited for business acquisition. A 7(a) loan can offer up to $5 million in funding, at competitive interest rates. The time you have to repay the loan can extend up to 25 years (for commercial real estate).
• Qualifying for an SBA loan may be easier for established businesses with strong revenues and good credit. There is a down payment required for SBA loans, which is typically between 10 and 20 percent. There’s also a separate SBA guarantee fee borrowers must pay.
• If you are able to qualify for an SBA loan, one downside to keep in mind is funding speed. It could take up to 90 days or longer for your loan application to be approved and for the loan to be underwritten. That type of time frame may not be suitable if you’re trying to move quickly on a business or franchise purchase.
• Term loans
• A term loan offers a lump sum of capital, repaid at fixed installments over a set time period. Rates may be fixed or variable for term loans and borrowing amounts are typically lower than SBA loans.
• You can find term loans through banks, credit unions or online lenders. Repayment terms are often in the five-year range, although this can vary by lender.
• Most term loans are secured, and you may be asked to sign a personal guarantee — which holds you, the business owner, personally liable if your business fails to make payments.
• Generally, approval for a term loan is contingent on many of the same factors associated with SBA loan approval: time in business, credit scores, revenues. A key difference is funding speed. You may be able to complete the loan process and get funded in a few business days with an online lender, versus several months with the SBA.
• Startup loans
• Startup loans are designed for new entrepreneurs who are in the early stages of launching a business. That includes acquiring a business or franchise.
• A startup loan is similar to a term loan but they may be easier for new business owners to qualify for. While a term loan might require you to have at least two years in business, for example, startup loans are more lenient.
• That being said, you’ll still need to have a solid business plan and a good credit history. And some lenders may expect you to offer collateral or a down payment to secure a startup loan.
• Rollover for Business Startups (ROBS)
• A Rollover for Business Startups (ROBS) allows you to access funds from your retirement account to invest in a new business. You can use the capital towards the cost of acquisition, working capital, or for a down payment towards another form of financing.
• The major positive of ROBS is that you won’t face early withdrawal penalties, taxes or interest charges. And since it’s your own money, there are no repayments.
• However, there are certain criteria you have to meet including that your retirement account is a tax-deferred account and either a Traditional 401(k) or IRA (Roth IRAs are not eligible), your business is a C-Corp, and you, the business owner, must be a legitimate employee in the business.
• Additionally ROBs have a number of other regulatory requirements (such as offering a retirement plan to employees), and you’ll likely need to invest in ongoing relationships with legal and tax experts to stay compliant.
• Setup fees can add up quickly, so you’ll need at least $50,000 in retirement savings for this form of financing to make sense.

Applying for business acquisition financing can be a tricky endeavor due to the number of factors lenders take into account: not only are your financials as a borrower and experience as a small business owner put under a magnifying glass, but lenders also want to know the history of the business being acquired (such as the business’s assets and liabilities), as well as your plan to make the acquired business succeed.

There are some key things to consider as you prepare to apply for a business acquisition loan. How you approach these issues can make a difference in how easily you’re able to be approved, or if you’re able to get approved at all.

This is an important question to ask since there’s a large investment of time and money involved.

Before you get started, you should consider whether or not acquiring a business is the best tool for growth.

It’s helpful to review your current cash flow to ensure that you can sustain the payments associated with a business acquisition loan, while also taking into account the financial state of the business you want to buy.

For instance, you’ll want to know how profitable the business is, what the cash flow situation is like, and what’s on the balance sheet. These are all things the lender will look at closely so it’s important that you be familiar with the numbers.

Ideally, the business or franchise should be financially healthy, with clear indicators that it will remain that way once you’ve completed the purchase. Also, consider the timing. If you have other strategies for growing your business that are waiting on the backburner or more immediate needs, such as new equipment, then it might make sense to defer the acquisition until you’ve addressed those items.

Business valuation

The lender is going to want to have the most accurate estimate possible for the value of the business you plan to buy. This valuation number is one factor lenders use to assess your risk level as a borrower.

You may need to get a formal business valuation from an independent company during the loan process. At the very least, you should be able to provide the lender with key financial statements pertaining to the business, such as a statement of cash flow, profit and loss statement, and  balance sheet. The lender may also ask to see prior year tax returns from the business’s current owner.

All of these figures are used by the lender to evaluate the business’s profit margin. If the business doesn’t prove profitable on paper, that could be a roadblock to getting an acquisition loan.

Letter of intent

A letter of intent is drafted by the buyer and spells out the proposed terms of purchasing the business to the seller. You’ll need a copy of this letter to share with your lender when applying for an acquisition loan. Typically, a letter of intent includes a clause stating that the offer is contingent on the buyer qualifying for financing. This gives you a way out of the deal if you fail to qualify for a loan.

Financial documents

Last but not least, you’ll need to give the lender certain financial documents relating to your personal and business finances. That includes:

• Copies of personal and business tax returns for the previous two to three years
• Two to three months’ worth of personal and business bank statements
• An updated balance sheet
• A profit and loss statement
• A statement of cash flows
• An updated business plan detailing your objectives for acquiring the business
• Future projections for sales once the acquisition is complete
• An estimate of your current debt service coverage ratio

The lender will also check your business and personal credit reports and scores. Having each of the documents listed above prepared beforehand can save time during the application process.

• 2 most recent years of business tax returns
• 1 most recent year of personal tax return
• 6 most recent months of business bank statements
• Business debt information
• Signed guarantor form for any owner with 20%+ ownership of the business