Buying an existing business can be an effective strategy to grow your operation. But if you don’t have enough cash to make the purchase, a business acquisition loan could help you finance the deal.
There were more than 17,500 mergers and acquisitions in North America in 2018, according to the Institute of Mergers, Acquisitions and Alliances.
Types of business acquisition loans
There are several ways to finance a business acquisition. In some cases, the seller may loan you the money and accept payments taken from your business profits. Or, you could assume the business’ existing debt by purchasing both its assets and liabilities.
You could also pursue a leveraged buyout, which involves using business assets to fund the purchase. However, a leveraged buyout typically requires additional financing, such as a business acquisition loan.
Business purchase loans come in a variety of forms. Here are a few for which you could apply.
A long-term business loan can finance a wide range of purchases — generally between $25,000 and $200,000. Long-term loans have fixed monthly payments and fixed interest rates, which allow you to plan for regular payments. You could be required to provide a 10% to 30% down payment. These loans typically must be paid back in three to 10 years and often have lower interest rates than financing products with shorter repayment terms, such as short-term business loans that must be paid back between three and 18 months.
Lenders may require substantial paperwork from applicants, which could slow down how long it takes to get funding. Some businesses could have trouble qualifying since borrowers usually need two years in business, a strong credit profile and collateral to be eligible for long-term loans.
The U.S. Small Business Administration guarantees a portion of loans made to small businesses through partner lending institutions. SBA loans range from $500 to $5.5 million for qualifying small businesses. You may be required to make a 10% to 20% down payment. The 7(a) loan program is the SBA’s primary financing option and may be best suited to fund business acquisitions. The standard 7(a) loan is available for up to $5 million. The SBA guarantees 85% of loans that are $150,000 or less, and up to 75% of loans exceeding $150,000.
Repayment terms for 7(a) loans could be up to 25 years for real estate purchases and up to 10 years for equipment purchases or working capital. Interest rates can be fixed or variable and would be based on the prime market rate, plus a markup rate. The SBA caps the percentage that lenders can add to the prime rate to limit how much interest borrowers must pay.
Equipment loans are designed to finance the purchase of business assets, which could be useful if you’re buying a business based on the value of its equipment. The equipment would act as collateral on the loan, which could lower the interest rate and make payments manageable. Interest rates could range between 6% and 12% depending on factors such as your terms and down payment. Borrowers typically have to make a 10% to 20% down payment and need good credit to qualify for financing.
Repayment terms for equipment financing generally range from six months to 10 years. In some cases, the terms of an equipment loan could exceed the useful life of the asset.
Where to find a loan to buy a business
Business acquisition loans are available from traditional banks and alternative online lenders. To give you a starting point, we’ve rounded up a few lenders that specialize in business acquisition financing or SBA lending.
Live Oak Bank
Live Oak Bank is an SBA lender offering acquisition loans to veterinarians, pharmacists and investment advisors. Live Oak Bank is headquartered in Wilmington, N.C., but it lends to businesses nationwide.
Live Oak Bank issues SBA 7(a) loans up to $5,000,000 to buyers of companies with $250,000 to $1.25 million in EBITDA, or earnings before interest, taxes, depreciation and amortization. Those loans have 120 month repayment terms, and interest rates are subject to the SBA cap. If you’re acquiring a business with more than $1 million in EBITDA, you could be eligible for a companion acquisition loan up to $2.5 million from Live Oak Bank. Companion loans have repayment terms between five and seven years. The interest rates, according to Live Oak Bank, may be higher than rates for SBA-backed loans.
Ameris Bank, with locations across the South, offers financing for business acquisitions. Businesses of all sizes can apply for funding. Repayment plans can be set up on an annual, semiannual or monthly schedule. Rates and terms are competitive, according to Ameris Bank, and would depend on your profile as a borrower.
It is also an SBA preferred lender and issues SBA loans to finance business acquisitions. Applicants would be required to provide at least 10% equity to qualify for an SBA loan. Repayment terms could be as long as 300 months, and rates would be subject to the SBA cap.
Smartbiz is an online marketplace specifically for preferred SBA lenders. Smartbiz matches lenders to applicants who may have trouble qualifying for loans from their local bank. Loans are available for up to $5,000,000 with interest rates between 6.50% and 8.75% and terms between 120 and 300 months.
Borrowers must have at least two years in business, good credit, no recent bankruptcies and sufficient cash flow to repay debt. Smartbiz can process an application and disburse funding in as few as seven days.
Banner Bank, which has locations in California, Idaho, Oregon and Washington, offers merger and acquisition financing to business owners looking to grow through acquisition or to buy out a business partner. Loans come with fixed or variable interest rates and terms up to 84 months. Applicants would need to set up a meeting with a relationship manager at their local bank branch to find out if they qualify.
How to get a business acquisition loan
When applying for an acquisition loan, the lender would likely dig into details about your business, as well as the business you plan to buy.
Be prepared to share the following information about your company with lenders:
- Personal credit history: Having a strong personal credit profile and a FICO Score exceeding 680 would make you appear more attractive as a borrower and could help you get a lower interest rate.
- Professional experience: Your success as a business owner would impact whether a lender would issue you a loan to acquire and manage another business. If you do not own a business, relevant industry or career experience could be valuable.
- Business plan: A lender would review yours to make sure you have a strategy to grow your existing business and the acquired business.
- Financial documents: To illustrate your record of operating profitably, you would need to submit financial statements such as your balance sheet, income statement and cash flow statement. A lender would want to see if your business will generate enough cash flow to repay an acquisition loan.
- Industry: Lenders view some industries as riskier than others. Professional service providers tend to be safer borrowers, while volatile businesses such as restaurants, retailers or vice-related companies could be considered risky.
The industrial sector has seen the highest percentage of business transactions since 1985. Behind industrials is the technology and financial sectors. On the other hand, mergers and acquisitions are less frequent in the telecommunications, retail and real estate industries.
Regarding the business you plan to acquire, a lender would likely evaluate:
- Business credit profile: The business should have a strong credit profile that shows a history of making on-time payments to vendors and suppliers.
- Financial statements: The company’s balance sheet, profit and loss statements, tax returns, current debt liabilities and cash flow analysis would give the lender a look at the viability of the business.
- Projections: Revenue and sales projections for the next few years would also help a lender understand the potential value of the acquisition.
- Valuation: The valuation of the business would show how much the deal is worth, which would affect your loan amount.
Before giving you the green light, a lender would want to make sure you’re buying an established business that would generate enough revenue to allow you to repay your debt. With this information, you could make sure the loan application process goes smoothly and increase your chances of approval.