How to Buy a Business With a Business Acquisition Loan

Starting and growing a business can be rewarding, but it isn’t easy to build something from the ground up.

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How to Buy a Business With a Business Acquisition Loan

Starting and growing a business can be rewarding, but it isn’t easy to build something from the ground up.

Instead, you might consider buying an existing business. 

An existing business has a proven business concept. You’ll save a lot of time by not having to do the work of starting a business — picking a location, buying inventory/supplies, and creating compelling marketing to acquire customers, to name a few.

But when you opt for buying a business over starting one, you’re trading the hard work of building something from scratch with the complexity of acquiring an existing entity. 

Among the necessary considerations of buying a business is financing the purchase. Few people buy a business outright with cash. You’ll likely be seeking a business acquisition loan — a process made easier when you work with a loan broker. Here’s a quick guide on obtaining a loan to purchase a business.

What Kinds of Business Acquisition Loans are There?

 

Business acquisition loans aren’t necessarily a specific type of loan. They’re traditional loans borrowers use with the particular purpose of buying a business. 

In many cases, they can be easier to obtain than loans for new businesses — new businesses are much riskier than something that’s been operating for a long time.

You can obtain business acquisition loans from a few sources.

Term Loans

Term loans are traditional bank loans. These are easy to find and generally come with great interest rates.

But unless the business you’re buying has promising financials, and unless you have excellent credit and financials yourself, then a term loan may be hard to come by.

SBA Loans

SBA loans may be your best bet when buying a business. They are guaranteed by the SBA, making them less risky to the lender. Thus, interest rates are capped at a specific rate.

SBA loans generally require collateral and strong credit, though. Lenders may add their own requirements as well. 

Still, an SBA loan may be easier to obtain than a traditional term loan. 

Startup Loans

If you don’t already own a business, you might qualify for a startup loan. Of course, you’ll need to prove your ability to run a business, and you might have to make a down payment.

Requirements For Getting a Loan to Buy a Business

Business Valuation

First of all, your lender needs to know how much the business is worth. That way, they can lend the correct amount for the business acquisition.

Either you or the seller will have to hire a business valuation company (or you can split the cost with the seller) to valuate the business. If there’s commercial real estate, an appraisal will be required as well. Some large banks hire 3rd-party valuation companies instead.

Down Payment

Down payment depends on if there’s commercial real estate involved. If you’re buying the real estate with the business, you should expect to put down 10-15% of the entire purchase — business and real estate. If you’re getting an SBA loan, your new business will need to occupy 51% or more of the building. The rest can be leased or rented to others if you meet this 51% requirement.

If you’re not buying commercial real estate for the business, expect to put down 20%-30% — although you might have to pay more. 

Collateral

If you’re buying a business and its commercial real estate, then the real estate serves as collateral for the loan. Otherwise, you should plan on putting up your own collateral to secure the loan.

If you’re getting an SBA loan, the SBA requires dollar-for-dollar collateralization for loans above $350,000. That means if you get a $500,000 loan, you need $500,000 of collateral.

You can factor in the acquiree’s assets and equipment into the collateral, but the SBA requires you to valuate them at half their value or less for collateral purposes. You may need a significant amount of collateral to cover the gap.

Any loans lower than $350,000 won’t require dollar-for-dollar collateralization, but you’ll still need adequate collateral.

Letter of Intent

A letter of intent is a legally non-binding agreement that clarifies the key points of a deal and sets, in writing, the intentions of the buyer and the seller in negotiations.

Most letters of intent include a clause that makes the purchase contingent on your ability to get the loan you need. That way, if you fail to get funding, you can back out of the deal.

Financial Documents

Your lender wants to see a slew of documents when you’re applying for a business acquisition loan.

  • Business financial statements — both the acquiree’s and yours (if you currently have a business)
  • Bank statements
  • Three years of business and personal tax returns
  • Records of other loans
  • Collateral documentation
  • Explanation of how you will use the loan to help the business

Navigating a Business Acquisition

 

When purchasing a business, it’s helpful to simplify as many things as possible. By working with a loan broker like BCCUSA, you can hand off your search to experts that work tirelessly to find you the best business acquisition funding source.

We’ll handle the entire process from beginning to end, from compiling your financial documentation to connecting you with lenders and closing on the financing. We’re always here to help our clients maximize their business success. Schedule a free consultation today.

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