Knowing everything about business acquisition loans or starting a business from the ground up is challenging for any entrepreneur. There are many hurdles to overcome. Some of these include marketing the new business, hiring employees and building a customer base. However, there is an easier way to become a business owner.
Many new business owners don’t want to turn to angel investors so they look for other options for acquire some finances.
Using business acquisition loans, you will be able to buy a business that has already been established or better yet, open a new franchise. However, the amount of financing that you can get using this loan simply depends on your qualifications.
With business acquisition loans, you will buy someone else’s existing business or buy out your partner for a business that you already own. It is particularly useful for financing the purchase of a franchise that is well-established and has a handful of locations. This kind of loan is better used for purchasing a thriving company.
How Do Business Acquisition Loans Work?
The only way to secure this kind of business financing is by providing documentation that prove both you and the business presents minimal risk to the lender. These documentation include the proof of your personal as well as the business finances. After completing the relevant forms and presenting all required documents, you will find lenders who want to work with you. This way, you can compare various loan offers and decide on what suits you best as far as financing goes.
Common Types of Business Acquisition Loans
After you’ve acquired your business you might want to consider getting some non-dilutive loans so your business can function without bring on investors. There are four common types of acquisition loans. These include:
Traditional Term Loans
These are business acquisition loans that have fixed interest rates and are paid within a certain time period. They come with simple terms- a borrowed fixed amount of money for the specific business purpose. Also, the loan should be paid back at a fixed time and with a fixed interest rate. These traditional loans are favorable for many entrepreneurs but are not necessarily easy to come by.
Just like the name suggest, startup loans are for relatively new entrepreneurs who are looking to buy an established business on their own. These are typically shorter term loans and are offered by lenders who do not expect revenue or credit history from the business. However, these loans are difficult to come by.
If the majority of the purchase price for the business you want to acquire is based on the value of the equipment being transferred, then applying for equipment financing is the best option. This kind of business acquisition loans can purchase everything from production machinery to computers.
SBA 7 Loans
SBA loans only incentivizes for the approval of more borrowers by lenders. As such, this increases the chances of a small business to get funded because a majority of the risks are mitigated. Lenders also approve new borrowers who are simply embarking on new business ventures. With an upwards limit of $5 million for small businesses, it is easy to be a thriving entrepreneur if you acquire this type of loan.
Which Loan Is The Best For Your Business?
The best financing option when buying business that is already up and running is dependent on the state of the business. Just because you get a lender with flexible terms does not mean that you should not honor your part of the bargain. The lack of capital is not the only reason to seek business acquisition loans. If you cannot agree on the price with the seller, this loan will also enable you to bridge the gap.
Do Your Finances Play A Role In Acquiring A Business Acquisition Loan?
When you have determined the business acquisition loan that suits you best then it is time to prepare all your personal finances and any financial documentation that directly affects your business. Lenders will automatically scrutinize your personal and financial history to determine whether you are a good candidate for the loan.
Lenders consider the following criteria before they offer acquisition loans:
Personal Credit Score
This is one of the most important factors in determine your loan eligibility. This is because your personal credit score acts as a significant factor in making your business acquisition work. After all, they are leading money to the individual, not just the business. With a credit score of 650-700 and above, you will most likely have an array of loaning options. However, a lower 500 mid-range score is considered a poor rating.
Business Credit Rating
Your personal credit score is only the beginning of your exclusion but your business credit score also plays an equally big role. Ensure that your payment history, credit card information, new credit and length of credit history is up to standard.
The lender may ask you to verify your personal income and the revenue of your state or federal tax returns. It is not advisable to have missing tax information. All your paperwork should show that you are in good standing.
If you are in any form of debt in regards to your current business, then you may not be able to be granted a business acquisition loan. Any outstanding debts you may have take center stage because of the risky nature of acquisitions. As such, settle any outstanding debts if you want to approve for a new loan.
Cash Flow Statement
This acts as a snapshot of the financial health of the business and whether it can support debt. It is also a sign that you are managing your cash flow. If you are struggling financially, do not expect to acquire this loan.
Seeking out a loan involve dealing with real people who are willing to support you in all financial aspects of realizing your dream as a business owner. Therefore, be upfront about your finances and trust that you will get the assistance that you need. Lender simply want to use a strong overall picture. Demonstrate that they will not be taking too much risk, show that your business is the best investment they could ever make.