Advertiser Disclosure

Small Business

Working Capital Loans: The Complete Guide for 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

working capital
iStock

As a business owner, you know that you need working capital to turn a profit. Without inventory, cash and receivables, you’re unlikely to stay in business long. However, getting the working capital you need can be a challenge.

In an ideal world, your business would generate working capital from cash flow. Unfortunately, over a third of all business owners rank cash flow as a top challenge facing small business owners. Without sufficient working capital, your business could be one of the 50% of businesses that fail within their first five years.

If you’re a company owner looking to boost your bottom line, improving the amount of working capital available may be the key to your success. By managing your company’s financial needs, creating a financial plan and using debt intelligently you will set your company up for long-term success.

What is working capital?

Working capital measures your company’s ability to meet your financial obligations in the short term. Lenders may want to look at your working capital to see how well you manage your company’s cash flow.

Another way to define working capital is the measure of your assets that can easily be converted to cash. To calculate your company’s working capital, add up your company’s current liquid assets (including cash, inventory and accounts receivable) then subtract your current financial obligations (including accounts payable, short-term loans, utilities, payroll, taxes etc.).

For example, an auto repair shop may have $32,000 in cash, $18,000 in accounts receivable (invoices that will be paid in the next month) and $14,000 in inventory.

These are the shop’s current assets:

Current AssetsCurrent Liabilities
Cash $32,000Accounts payable: $10,000
Accounts receivable: $18,000Payroll: $8,000
Inventory: $14,000Credit card payment: $6,000
Long-term loan payments: $3,000
Total current assets: $64,000Total current liabilities: $27,000

Working capital


$64,000 - $27,000


=


$37,000

When your current assets are worth more than you owe, you have positive working capital. On the other hand, when your current bills exceed your liquid assets, you have negative working capital.

Without sufficient working capital, your company could run into a cash crunch. At the very least, companies without much working capital struggle to jump onto new opportunities. In a worst-case scenario, your company’s bills go unpaid (or are paid late).

A few late payments might not seem like that big of a deal, but the problem could have cascading effects. Paying banks and vendors late will negatively affect your commercial (or business) credit score. In a short amount of time, vendors may start to give you less favorable terms. Your business becomes unlikely to get favorable financing rates, and your commercial insurance premiums may start to rise. With all these factors working against you, staying in business and avoiding further liquidity crunches become a huge challenge.

Even with positive working capital, some companies may struggle with their cash flow. Eric Giltner, who heads the North Dakota region of the Small Business Administration, recounted this story: “I counseled the owner of a lawn service who had receivables of over $40,000 and $25,000 in debts. The owner’s problem was there was no ‘teeth’ in his policy on collecting those dollars [from customers]. The business owner had to get aggressive in his collection procedures and was able to recover enough to pay his bills.”

When collecting payments takes too long, staying in business becomes difficult.

If you have negative working capital, or your company regularly struggles with cash flow issues, you will need to start making some changes. Giltner recommends meeting with a local Small Business Development Center that can help you develop a cash flow projection for free. If you’re more interested in the DIY approach, you can use some of the financial projection templates from SCORE, a nonprofit organization that helps entrepreneurs and small business owners.

“Too many small businesses fail to do a cash plan,” Giltner said. “It’s the biggest reason that small companies run into cash flow problems.” Working on a cash flow projection not only helps you shore up your business model, it may actually help you get funding for a working capital loan.

Understanding working capital loans

If your company is low on working capital, you may want to look into a working capital loan to help you boost profitability. Working capital loans are short-term loans that aren’t secured by equipment, land or inventory. We’ve rounded up some of the best options for small business loans, including working capital loans with interest rates starting around 6.75%.

You can use a working capital loan to pay for almost any business need. Whether you need to expand your marketing efforts, pay for additional inventory or consolidate debt, you can use the funds from a working capital loan to meet your business objectives. Some business owners even use working capital loans to cover everyday operating expenses during a low profitability season.

Most working capital loans are issued by nonbank lenders. With typical bank financing, business owners spend an average of 33 hours per year seeking financing. Working capital loans are underwritten quickly.

Although the speed and flexibility of working capital loans make them appealing to many business owners, they have drawbacks. Most working capital loans have extremely short terms ranging from three months to three years in length. The loans often have weekly or even daily repayment requirements.

They also may carry high interest rates. A typical rate for a working capital loan is 1%-3% per month, plus a 2.5% origination fee. This works out to at least a 15%-45% APR based on a 1-year repayment schedule.

How to use a working capital loan

The interest rates on working capital loans are much higher than rates on business lines of credit from traditional banks. Business owners shouldn’t think of working capital loans as long-term solutions. Instead, business owners should use the loans as a quick source of capital while they work toward lower-cost, more sustainable borrowing options.

However, even high-interest loans may have their place in your business. These are just a few reasons you might consider the loans:

To cover seasonal hiring needs: If you work in construction or other seasonal businesses, you may need to pay seasonal workers before you get paid. A working capital loan can help you bridge the gap that your savings won’t cover.

To pay bills: If you don’t have the money to cover rent, utilities or vendor accounts, you can use the proceeds from a working capital loan to pay the bills while you work on boosting the bottom line.

To purchase inventory: Restaurants, food trucks and stores often have to pay for several days (or weeks) worth of materials before they can make money from the inventory. A working capital loan can help you cover a big upfront expense, so you can earn a profit over time.

To fund unexpected opportunities: If a low cash balance is keeping you from taking on a bigger, more profitable project, a working capital loan could help you take your business to the next level.

To fill a financing gap: Your business may have qualified for a loan from a traditional bank, but not for the amount you needed. A working capital loan can cover the gap, so that you can develop your business further.

Debt consolidation: If you owe multiple lenders or vendors money, and your company is at risk of missing a payment, a working capital loan could help you consolidate your payments into a single loan at a manageable interest rate.

Is working capital financing right for your business?

Depending on the opportunities and risks facing your business, a working capital loan may make sense. It’s important to understand the advantages and disadvantages of working capital loans. Business owners should also consider whether they have alternative financing options (including using cash savings).

Advantages of working capital loans

Speed: The most important reason to consider a working capital loan is the speed of funding. Entrepreneurs know that time is money. If you have to spend weeks applying for a loan, a business opportunity may pass you by.

Cash flow: Despite their high interest rates, working capital loans are designed to be easier on cash flow than traditional loans. With daily or weekly payment requirements, business owners don’t have to worry about making a big payment at the end of the month.

No collateral: Working capital loans are typically a form of unsecured credit. That means that you don’t need to put up land, equipment or other assets as collateral for the loan.

Flexible use: Finally, working capital loans are more flexible than traditional business loans. You can use the proceeds from a working capital loan for almost anything related to your business. For example, you can use loan funds to meet payroll, cover an inventory expense or create a new marketing campaign.

Available for subprime borrowers: Borrowers with personal credit scores as low as 500 can qualify for a working capital loan.

What type of business should use working capital financing?

Working capital financing is generally best for companies that have to complete a long project before their client pays them. For example, a construction company may obtain a working capital loan to purchase materials or pay employees while completing a building project that will take several months to build.

Working capital loans also makes sense when the loan will allow a company to take on bigger or longer projects than they could do with their current cash on hand. For example, a parts manufacturer can use a working capital loan to pay for materials and direct costs while they fulfill an order that is much bigger than usual.

Due to the fast underwriting and funding time, working capital loans may make sense for entrepreneurs who need funding now but can obtain a lower cost loan (such as an SBA loan) within a few months.

It’s important to remember that working capital loans require daily or weekly payments, so you must generate sufficient cash to cover payments while your business works to make a profit.

Disadvantages of working capital loans

High cost: The biggest drawback to working capital loans is the cost of borrowing. Although the interest you pay will depend on a variety of factors, borrowing money is always more expensive than using cash. In some cases, a business credit card may be a less expensive alternative.

Frequent payments: Although the daily or weekly payment schedule may be easier for cash planning, the frequent payments could make it tough to grow your savings.

Short payback: Working capital loans have terms ranging from three months to three years, but a common payback period is less than one year.

May not help you build business credit: Not all lenders of working capital loans report timely payments to Dun & Bradstreet, the primary creator of business credit reports.

Who should avoid a working capital loan?

Many business owners seeking a working capital loan need money fast, but Giltner recommends that business owners should create a cash flow projection before seeking funding.

Entrepreneurs can get free help creating cash flow plans through their local small business development center. In addition to projecting cash flow, Giltner urges businesses to taking steps to boost their bottom line. In particular collecting overdue receivables, selling excess inventory and seeking out better terms with vendors can help business owners gain working capital without taking on loans.

Even when you need cash quickly, a working capital loan may not be the right answer. Some business owners can get better interest rates and terms using a small business credit card. An unsecured line of credit from a local bank could serve a similar function to a working capital loan, but at a lower interest rate (in some cases).

Shopping for working capital loans

When shopping for a working capital loan, it’s important to understand that working capital loans can be quite different than other forms of loans. The first major difference between traditional financing and working capital financing is how interest rates are expressed.

The typical term for interest rate is “Cents on” as in you’ll borrow $10,000 for 25 cents on the dollar. That means you’ll pay $12,500 to borrow $10,000. This cost includes $10,000 in principal balance repayment, and $2,500 in interest and fees. Some contracts allow borrowers to defray the interest cost by paying early, but other borrowers must pay the full amount whether they pay early or not. If you prefer to think in annualized interest rates, you can ask your lender to convert the fees to an annualized percentage rate (APR).

No matter how the loan interest rate is expressed, you must take the time to understand the terms. Are you paying an origination fee? You can see the cost of the fee in your loan funding documents. It’s common for working capital loans to carry a 2.5% origination fee. You should also understand whether the loan has late payment fees, prepayment penalties or other hidden costs. Before signing any loan documents, take the time to understand the loan contract. A loan officer should be able to explain all the fees in the loan documents.

Business owners also need to prepare to get loan offers for a smaller amount than they need. Under certain circumstances, lenders will fund a business owner’s full request for a loan, but sometimes they lend as little as half the requested funds. The total amount your business receives may depend on your business’s profitability, your credit history and other factors.

The loan offer experience will vary by lender, but approved borrowers can typically choose from a range of loan amounts and repayment periods. You’ll need to weigh the total cost of borrowing and the daily or weekly payments to determine which loan works best for your business.

Consider starting your small business loan search on LendingTree, our parent company. You simply fill out a short form and can potentially receive up to five offers from lenders.

LendingTree

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

Minimum requirements for a working capital loan

Although working capital loans are more accessible than other forms of business financing, you must still meet some baseline requirements to qualify.

These are the other things you may need to qualify for a working capital loan:

A reason for seeking financing: Before applying for a business loan, you need a solid explanation for why you want the funds. Business owners who can’t explain how they will use the loan, may struggle to find a lender willing to work with them. Lenders want to be repaid, so they need to see that the loan is part of your financial plan. Even if you need the loan to catch up on bills, you need to explain how you’ll use your new financial position to boost your profits.

A business checking account: To qualify for a working capital loan, you may need a separate business checking account. This is the account where you pay most of your businesses expenses, and where you deposit income.

Business bank statements: Recent bank statements (from your business bank account) can show your historic spending. They will also prove whether you meet gross revenue requirements.

Annual revenue: Different lenders have different revenue requirements for business borrowers.

Time in business: To prove your business’s track record, you may be asked for a copy of your articles of incorporation, a business tax return or older business bank statements.

Personal credit score: The business owner may need to show their personal and/or business credit score(s).

If you qualify for a loan, you may need to submit further documentation before the loan becomes funded.

How to apply for a working capital loan

Thanks to internet marketplaces, applying for a working capital loan is now easier than ever. Many online applications will ask about the following areas:

Your industry: Some lenders specialize in working with borrowers from specific industries, so lenders may ask about your company’s industry.

Annual revenue: You need to provide an estimate of current and projected revenue for the upcoming year.

Personal credit score: To help with underwriting the loan, you need to provide an estimate of your personal credit score. Many credit cards provide estimates of your credit score. You can also get a free credit score from LendingTree, MagnifyMoney’s parent company.

Date of incorporation: This is the date your business was founded. If you have articles of incorporation, the date will be on those documents. If you’re a sole proprietor, give the date you started doing business.

Entity type: Is your business an LLC, a partnership or a sole proprietorship? Maybe it operates as an S or C Corporation. Although the entity type won’t affect your profitability, it will affect how your lender writes the funding contract.

Employer Identification Number (EIN): The EIN is a nine-digit business tax identification number assigned by the IRS. You will need this number to apply for credit. If you don’t have an EIN, you can use your Social Security number.

Social Security Number (SSN): Your SSN helps validate your personal credit score.

In addition to the information above, you may need to upload a few documents to the lender’s secure website.

Once you complete your application, you should keep your phone handy. A representative may call to clarify some details in your application. You may also be asked to submit more documentation.

For example, some businesses may need to provide include month-to-date bank statements, older bank statements, proof of payoff letters or other documents explaining your company’s financial health. You may also need to submit your company’s articles of incorporation, a business tax return or a copy of your driver’s license.

Some lenders provide fast funding as quickly as 24 hours.

Do I need a business credit score to qualify for a working capital loan?

Your business does not need a business credit score to qualify for a working capital loan. That’s good news for businesses that don’t have any existing credit. A lack of business credit score won’t hurt you when applying for a working capital loan through most online lenders.

If your business has a credit score, lenders may consider it during underwriting. Businesses with good business credit scores may be able to qualify for better terms and rates on working capital loans. On the other hand, a business with a bad business credit score may not qualify for a working capital loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

Advertiser Disclosure

Small Business

Brick-and-Mortar vs. Online Banks: Which is Better for Small Businesses?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Getty Images

Separating your personal and professional finances is crucial when starting a business, and changes in technology are making it more convenient to do so. Not only could you turn to traditional brick-and-mortar banks, but you could take advantage of the resources that digital banks offer.

Opening a business bank account would allow you to clearly track your income and expenses without putting your personal spending in the mix. Managing a business bank account would also help you build your credit profile — you could become eligible to open a business line of credit or credit cards connected to your account.

Whether you choose an online bank or a brick-and-mortar bank would depend on which type fits your needs as a business owner. Keep reading to find out what kind of bank would be best suited for you.

Small business banking: Brick-and-mortar vs. online banks

A key difference between traditional and online banking is the flexibility that digital banks provide, said Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. Small business owners could have around-the-clock access to online banking services as long as they have a device and an internet connection.

“This can certainly help busy business owners who are strapped for time by allowing them the option to bank on their schedules,” he said.

Brick-and-mortar banks

Although most brick-and-mortar banks now offer online banking features, consumers still must make some transactions in person, Coleman said, such as cash transactions that require personal identification. When opening a business checking account with Chase, for example, customers must meet with a business banker before enrolling in online and mobile programs. Still, this could be a draw for some business owners.

“Some consumers are simply more comfortable having a physical banking location where they can perform transactions and speak to banking associates in person,” Coleman said.

New business owners could also benefit from the guidance that bankers provide, said Grier Melick, business consultant at the Maryland Small Business Development Center. Establishing a personal relationship with a banker could also be beneficial if you plan to apply for a small business loan. You may have a better chance of being approved for funding if the bank already knows and trusts you.

“Oftentimes, small business owners do not know everything that they need to from a business banking perspective,” Melick said. “Having some direct human involvement can help with that.”

Online banks

Online banks have lower overhead costs than traditional banks, and those lower costs typically result in higher interest rate yields on deposits for digital banks than branch-based banks, he said. For instance, a high-yield business savings account could have an APY as high as 2% and no minimum account balance.

However, brick-and-mortar banks have the advantage of allowing customers to make cash deposits or withdrawals; an online bank typically wouldn’t offer that feature, Coleman said. However, online banks sometimes belong to free ATM networks, like Allpoint, which would allow you to avoid the withdrawal fees that you’d incur at other ATMs.

Best of both worlds

It’s possible to have accounts at both types of banks, Melick said. For example, the owners of a brick-and-mortar store may start with an account at a local bank branch, then open a digital account when they decide to start selling online.

“Instead of severing ties with the bank, they could open an online account as well to handle their other revenue streams,” he said.

You could be subject to banking fees at both traditional and online banks, Coleman said. However, online banks generally charge considerably fewer fees and you may be able to avoid overdraft, monthly maintenance and ATM fees that come with a traditional bank account.

Here’s a quick look at how the two types of banks stack up.

Online banksBrick-and-mortar banks
24/7 access to accounts and banking features.Online banking features typically offered, but some transactions may have to be completed in-person during bank hours.
High-yield accounts available.Lower interest rates because of overhead costs.
Customers cannot complete in-person cash transactions or meet with bank representatives.Customers can make cash transactions, and bank representatives are available for meetings.

Digital services on the horizon for traditional banks

Online banks are growing in numbers and popularity, Coleman said. Traditional banks have taken this trend as a cue to bolster digital offerings for consumers.

“As a result, we are seeing traditional banking introduce more digital options for providing services,” he said.

The presence of digital financial technology is expanding within the financial services industry, comprising 7% of the total equity of U.S. banks, according to research from consulting firm McKinsey. To keep up, traditional banks must consider ramping up digital efforts in areas such as design, innovation, personalization, digital marketing, data and analytics to provide value to customers.

A few traditional banks rolling out expanded digital services include:

Bank of America

Earlier this year, Bank of America created Business Advantage 360 for customers who have business deposit accounts with the bank. The free tool provides a digital dashboard showing business owners their major expenses and transactions, as well as automated cash flow projections that can be adjusted to account for new sales or other data. Users can also connect with small business bankers through the dashboard.

PNC Bank

PNC Bank rolled out a digital business lending platform this year in partnership with OnDeck, an online small business lender. Leveraging OnDeck’s digital loan origination process, PNC aims to provide customers with business financing in as few as three days, a significantly faster timeline than how long it would take to process a conventional bank loan.

Popular Bank

Similarly, New York-based Popular Bank announced a partnership last year with Biz2Credit, an online lender serving small businesses. Popular Bank leans on Biz2Credit’s technology to digitally process loan applications outside of regular bank hours, effectively speeding up time to funding.

As the lines begin to blur between online and brick-and-mortar banks, business owners may find themselves with an increasing amount of digital opportunities. However, a demand for brick-and-mortar banking will likely remain. Small business owners who borrowed from an online lender reported feeling less satisfied than those who borrowed from a community bank — 49% vs. 79% — according to a Federal Reserve survey.

“Whether consumers turn to online only banks, or traditional banks that offer online products and services, the availability of online options will more than likely continue to grow,” Coleman said.

Which bank is best for your small business?

Whether you choose an online bank or a brick-and-mortar bank to house your business funds would depend on your personal preference, Coleman said.

No matter which you pick, make sure the Federal Deposits Insurance Corporation insures your bank of choice, he said. Single consumer accounts, joint accounts and business accounts, among others, would be protected at FDIC-insured banks in the event of bank failure. Deposits up to $250,000 should be safe and covered.

If you like having the ability to sit down with a banking professional to discuss your business needs, a branch-based bank could be the better choice, Coleman said. The physical presence that traditional banks provide could add a level of trust and reassurance. Keep in mind, though, that most locations have standard business hours that may not be conducive to your schedule as a business owner, he said.

A digital bank would allow you to complete your banking activities on your own time, said Coleman, though traditional banks oftentimes provide online services as well. He also noted that you may want to avoid using a public WiFi network to make business transactions, as those networks may not be secure and your information could be vulnerable.

A digital bank wouldn’t offer the same in-person service as a traditional bank, Coleman said, but you may not feel like you’re missing out.

“If the business owner already knows what they are looking for in a bank, and the online bank meets their needs, then they may prefer the online bank for its convenience, potential lower fees and higher interest on deposits,” he said.

All business owners should at least consider opening a high-yield savings account for cash that isn’t needed for daily operations, Melick said.

“Small businesses need to make sure that every penny they make works for them,” Melick said. “Oftentimes, the best way it can is through online banking accounts.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

Advertiser Disclosure

Small Business

Business Acquisition Loans: What They Are and Where to Find Them

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Getty Images

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.

Continue reading to find out where you could find a loan to buy a business — and how to boost your approval chances.

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.

Term loans

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.

SBA 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 financing

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

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

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

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.

The bottom line

Business acquisition loans can fill the gap when you want to purchase a company but don’t have enough funds to do so. Term loans, equipment loans and SBA loans could be used to cover a business acquisition. You could apply for financing from a traditional bank or online business lender to obtain the necessary money to finance the deal.

Be sure to shop around before accepting an offer. Wait for a loan that not only provides the amount of funding you need but comes with repayment terms and interest rates that work best with your small business.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]