Buying an existing business is far better than starting a business from scratch. You join a company with stable revenue, a loyal customer base, and established systems. However, the biggest challenge for small business buyers in it is capital. In this case, business acquisition loans are used. These loans are structured to fill the funding gap and help buyers to acquire a business and receive cash for operations, upgrades, and additional expenses. In this article, we will explain to you the types of business acquisition loans for small business buyers.
What is a Business Acquisition Loan?
A business acquisition loan is a type of business acquisition financing that helps business buyers buy an active business, franchise, or joint venture with specific terms from public/private banks, online lenders, or credit unions. These loans can be paid in the form of EMIs. The borrower doesn’t have to repay the whole amount with interest at once. Another interesting thing about them is that they not only settle the purchase price of a business. It covers goodwill, working capital, equipment, inventory, legal, closing, and even transitional expenses.
Main Types of Business Acquisition Loans
The financial needs of every business buyer are different. Some just want low monthly installments, and some may be willing to pay high interest under some conditions. Therefore, there are several types of loans available. Each has unique terms, criteria, risk, and funds. Below are the common acquisition loan options:
1. SBA 7(a) Loans
The SBA 7(a) loan is the most widely used loan type for buying an existing business. These loans are backed by the US government small business administration loan program. There is no risk for lenders, which makes financing more accessible to buyers.
Pros: The primary benefit of an SBA 7(a) loan is affordability. Buyers often need a lower down payment and repayment terms of 10 years or more. In this, you can manage the monthly payments and cover cash flow during the initial stages of the deal.
Cons: The downside is time and paperwork. SBA loans for business acquisition demand detailed documentation, business valuation reviews, and very specific eligibility criteria. Approval can take weeks or even months, which may not be suitable for the seller who wants a quick close.
2. Conventional Bank Loans
A conventional bank loan is a standard loan given by private lenders (banks, credit unions). These business acquisition loans are not insured or guaranteed by the government. The candidate requires a strong financial profile to get it.
Pros: Banks often have high interest rates but are ready to approve big acquisition amounts. Buyers who have excellent credit, a good amount of cash reserves, and industry experience can use conventional loans, which can be profitable in the long run.
Cons: Banks are cautious. They ask for a high credit score, multiple sources of income, and valuable collateral. Many lenders also ask for personal guarantees, which increases the buyer’s personal financial risk if the business fails.
3. Seller Financing
Seller financing, also known as owner financing, is when the seller of the business lends the funds directly to the buyer and agrees to get the payment over time instead of all at once.
Pros: This option is flexible and often simple to arrange. Sellers may offer great repayment terms, low upfront costs, or even interest-only terms. If the seller is ready to finance you, it means that the business is successful.
Cons: It does not cover the entire cost of purchase. Buyers have to take out another loan. Also, there can be some disagreements over terms or performance expectations that can create disputes after the sale.
4. Asset-Based Loans
Asset-based loans or private equity loans are those in which the buyer borrows the money by liquidating the assets of the company being sold. The assets, such as accounts receivable, inventory, equipment, or real estate, are considered collateral.
Pros: These loans are approved faster than SBA or conventional bank loans. Approval is based more on asset value than credit history, which makes it accessible to buyers who may not qualify for other types of loans.
Cons: Loan amounts are limited to a percentage of asset value, and they may not cover the full acquisition cost. If the business struggles in the future, lenders can seize the assets.
5. Private Lenders / Alternative Financing
Private lenders/alternative financing is when the loan is offered by non-bank sources such as individuals, private funds, or online platforms. It is often used in real estate or businesses that need quick cash.
Pros: Approvals are fast, underwriting is lenient, and only a few documents are required. These loans are useful when time is short or when traditional lenders decline the application.
Cons: The trade-off is cost. Interest rates are high, repayment terms are short, and fees can add up. If it’s not planned carefully, these loans can make a hole in your pocket.
Factors to Consider When Choosing a Business Acquisition Loan
It’s important to choose the suitable type of small business loans for acquisition, as it can make or break your deal. Before signing on the contract, it’s important to take into account the interest rate and other factors to understand how the loan will affect your business in the long run.
- Loan size & down payment: Your loan amount should be sufficient for business purchases, including the down payment.
- Interest & overall cost: The lower the interest rate is, the better it is for you overall.
- Repayment timeline: Monthly payments should be longer, as it should be comfortable for you to pay the EMI while running the business.
- Credit profile: You should have a high credit score for fast approval and better terms.
- Collateral & guarantees: Know exactly what you’re giving as collateral for the loan.
How to Apply for a Business Acquisition Loan
One of the most searched queries of business buyers is “How to apply for a business acquisition loan.” Follow the steps:
- Prepare financial documents and business valuation: Collect tax returns, bank statements, financial statements, and business valuation on paper.
- Review personal and business credit profiles: Check your credit score and rectify your mistakes before you apply for financing to buy a business.
- Create a solid business acquisition plan: Show how the business will generate revenue and support loan repayments.
- Compare lenders and loan options: Look at interest rates, terms, and flexibility.
- Submit the application and complete due diligence: Be ready for lender questions and document verification.
- Close the loan and finalize the purchase: Sign, fund, and step into ownership.
Closing Remarks
A small business purchase is a big deal, and the right financing partner can make it a success. You have available options such as SBA 7(a) loans, bank loans, seller financing, asset-based loans, and private lenders. The right type of loans can help in the business growth, cash flow, and many other things that you can’t ignore. If you’re looking for a business financing expert, check out Yaw Capital. We help serious business buyers to get the right structure, lender, and terms to close acquisition deals quickly and easily. Visit our website for more details.
