Acquiring an existing business offers a unique path to entrepreneurship, allowing individuals interested in pursuing a business purchase to bypass the uncertainties of starting from scratch. If you don’t yet have the capital, you can secure a business acquisition loan to buy a business. Whether you're looking to buy out a partner, invest in a franchise, or expand by purchasing an established company, securing the right financing can be key in facilitating your next business venture.
This guide explores the types of business acquisition loans that are available and outlines the process of applying for financing to help you successfully navigate the acquisition process.
Key Considerations
- There are several options available for financing business acquisition including: traditional bank loans, SBA loans, seller financing, and loans from online lenders.
- Before applying for a business acquisition loan, business owners need to evaluate their financial needs and business plan and research the type of loan that can fit their needs.
- While selecting a business purchase loan, consider variables like interest rates, repayment terms, the lender’s eligibility requirements, and fees.
What is a Business Acquisition Loan?
A business acquisition loan, also known as a business purchase loan, is a loan you can use to buy an existing business. Business acquisition loans are offered from traditional banks, credit unions, and online lenders, and can cover acquisition costs, as well as costs like:
- Consolidating existing business debt
- Buying out a business partner or transferring ownership
- Opening a franchise
- Paying off business overhead
- Purchasing equipment or assets
- Setting up business space
- Expanding business operations
- Funding working capital needs
Types of Business Purchase Loans
There are multiple ways to finance your business acquisition. Depending on your financial position and goals, certain types of loans will be more applicable to your business. Let’s review the different types of business acquisition loans.
Traditional Bank Loans
Traditional bank loans consist of term loans, equipment loans, microloans, lines of credit, and more. They often offer competitive interest rates and long-term repayment options, have no set limits, and funding times can be as quick as a few days to a few weeks.
To qualify for a traditional bank loan, you typically need a strong credit history and proof that the business has been in operation for a minimum number of years and produces a minimum annual revenue, both of which are set by the lender.
Small Business Administration (SBA) Loans
The U.S. Small Business Administration is a federal agency dedicated to helping small business owners and entrepreneurs pursue their business ventures. SBA loans are facilitated through banks, credit unions, and other lenders who partner with the U.S. Small Business Administration.
SBA loans have several benefits, including competitive terms with comparable rates and fees, counseling and education support, lower down payments, and no requirement for collateral. However, they may have restrictions on what businesses may be acquired with their loans.
Seller Financing
In this case, the seller would finance the purchase of the business. As with traditional bank loans, you would need to create and define a loan agreement, including payment due dates, interest rates, and penalty fees.
Seller financing may help you settle on better interest rates than what traditional loans offer. To secure seller financing, you will need to demonstrate strong personal and business credit scores, as well as a history of business ownership.
Online Lenders
Online lenders provide business acquisition loans with varying terms and conditions. Some offer small business loans through a convenient and quick application process, often with faster approval times compared to traditional banks. These lenders may offer flexible repayment terms and can be a good option for businesses looking for more timely access to working capital. However, interest rates from online lenders could be higher than traditional banks, so it's essential to compare offers and read the fine print before committing to a loan. Some online lenders also require a minimum sales threshold, operational history, and specific ownership percentages for approval.
How to Get a Loan to Buy an Existing Business
Securing a business acquisition loan involves several key steps to demonstrate your financial readiness and business viability.
1. Evaluate Your Eligibility
Gather and analyze your personal credit and business credit scores, two years of tax returns, financial statements, and details of personal debts. This information will determine how much you can borrow. Assess the financial health of the business you are acquiring, including its credit score, financial statements, and operational aspects like cash flow and how it is managed, to uncover any hidden issues. Conduct thorough market research to find potential acquisition targets that fit your criteria.
If you already own a business and are looking to acquire another, lenders will want to know the financial health of that existing business. This includes the business credit score, financial statements, business tax returns, and business bank statements.
At BHG, we provide a concierge lending experience. We'll gather the necessary documentation for you, which may include income verification documents such as tax returns and bank statements. If anything else is needed to process your application, we'll reach out to work with you.
2. Develop a Business Plan
A lender’s decision also depends on how you intend to repay the loan through a detailed business plan. This will include a business valuation for the acquisition, using methods such as earnings multiples and asset-based approaches, any required business licenses, three to five years of financial projections or financial forecasting that detail clear growth strategies and financial objectives, and the specific strategies you will use to achieve them. Consider seeking professional advice to ensure your business plan is robust and comprehensive.
3. Apply for a Business Acquisition Loan
Once you’ve gathered the necessary financial documents and prepared a detailed business plan, you can select the financing option that best serves your needs and apply for a business purchase loan.
With BHG Financial, you can apply for a loan with minimal paperwork and no impact on your credit score. Loan specialists typically review applications in as little as 24 hours1 and may provide funds in a lump sum, depending on your qualifications. This can include large loan amounts up to $500,000,2,3 fixed, affordable payments with terms up to 12 years,2 and fast funding in as few as three days.1
How BHG Financial Can Help You
Securing a business acquisition loan can be a pivotal step toward achieving your entrepreneurial goals. By partnering with a reputable lender, you can obtain the necessary funding to purchase an existing business and benefit from competitive rates and flexible repayment terms.
BHG Financial offers business acquisition loans tailored for entrepreneurs and business owners. With our secured small business loans, you can acquire an existing business, purchase real estate, buy out a partner, and more. Get started by viewing your personalized estimate using our payment estimator.
FAQs: Business Purchase Loans
How can you qualify for a business acquisition loan?
To qualify for a business acquisition loan, you typically need a strong credit history, a business plan, and proof of financial stability. Lenders review your personal and business credit scores, financial statements, tax returns, and the business’s valuation before responding to the application.
What are the pros and cons of a business purchase loan?
A business acquisition loan provides capital to acquire an existing business, which can allow for immediate revenue generation and offers the added benefits of established business operations and an existing customer base.
On the other hand, a business purchase loan is a form of debt and may require a lengthy approval process or come with high interest rates or fees depending on the lender.
What kind of credit is needed to get a business loan?
To get a business loan, a good credit score is generally required. A personal credit score of 650 or higher is often preferred, though some lenders may accept lower scores depending on other factors. A strong business credit score and financial history are also necessary for securing favorable loan terms.
