Business Acquisition Loans: Understanding the Basics
Updated September 07, 2022
Acquiring an established company is a reliable business venture that possesses fewer risks and higher returns on investment than building a business from scratch. When acquiring a business, you’ll likely need to pursue business capital solutions so you can buy out the seller in full. Acquisition loans provide new business owners the ability to fully acquire the company without remaining in debt to the seller.
What Are Business Acquisition Loans?
Business acquisition loans are small business loans provided to business owners who are assuming ownership of a pre-existing business model. While taking over an existing business is much cheaper than launching a brand new company, it nonetheless entails substantial capital in order to purchase the business from the seller. In addition to purchasing the business, you’ll need money to transfer leasing agreements, attend to property renovations, and update or repair equipment.
How do You Qualify For Business Acquisition Loans?
Business acquisition loans can be challenging to qualify for because banks are often suspicious when a company sells. Though not always, selling ownership of a company can be indicative of financial difficulties, which the banks view as a serious risk.
As a result, in order to be eligible, you need to provide an infallible business plan to assuage any concerns the bankers may have regarding the economic viability of the company. In addition to proving great business finances, you must also demonstrate clean personal finances including your credit history, annual income, and history of paid and unpaid debts.
Alternative Ways to Finance a Business Acquisition
For those with poor or nonexistent credit, acquisition loans are still available. If you fail to qualify for a traditional loan or were unable to qualify for the full amount needed, the Small Business Administration (SBA) can provide additional loans with more lenient eligibility requirements.
The SBA provides government-backed loans, which allow them to decrease eligibility requirements and take higher risks on business owners. Their mission is to strengthen the economy by encouraging entrepreneurship among people of all backgrounds and economic levels, enabling a wider demographic of people to qualify for loans.
Financing Through the Seller
In some cases, the person selling the business may be willing to provide financing. This is usually used as a last resort after the buyer has pursued all other loan options. In the event the banks have denied loans to the buyer, the seller may be willing to work out a financing plan. These financing plans often come with higher interest rates than bank loans.
The terms will vary with each seller, but most sellers require a down payment of up to 25 percent of the total costs. In order to qualify the seller will need a history of your personal finances and credit history to ensure you are a safe investment.
Getting Started With Acquiring
Acquiring a successful business is a superb entrepreneurial pursuit, as it provides access to an existing business model with proven success. It also entails much lower startup costs than building a business from the ground up. Business acquisition loans provide needed monetary solutions to new business owners who are assuming the ownership of a preexisting business plan.
Pre-qualify now to obtain the capital your business needs.