Acquisition loans are a type of loan that is used to finance the purchase of a company or business. The loan is typically structured as a term loan, meaning that it has a fixed repayment schedule and a set interest rate.
Acquisition loans are common for growing businesses or those going through mergers and acquisitions. This type of loan may also help businesses acquire assets, like equipment or property, that can help them grow their bottom lines.
Types of business acquisition loans
There are five types of business acquisition loans. We’ll go through each option to help you understand which might be the best for your specific situation.
1. Small Business Administration (SBA) loans
SBA loans are business loans that are partially guaranteed by the federal government. The SBA offers multiple loan programs, but most SBA loans are term loans which can last up to 25 years.
These often offer the best interest rates available for business owners who don’t have the best credit and allow them to finance transactions with as little as 10% down. SBA loans are somewhat flexible and can be used for various types of acquisitions.
2. Conventional term loans
A term loan is repaid over a period of time ranging from 1 to 10 years, and are fixed. They are obtained through a bank or other traditional lender. These loans typically offer the best terms available and lowest interest rates and fees. However, they are difficult to qualify for and often take a longer time to provide funding.
3. Startup loans
Startup loans are best for companies that are still getting operations off the ground. They usually have a consolidated application process because there won’t be as extensive information to review about company finances. Interests rates may be higher because startup loans are riskier for lenders. Some programs limit borrowers to smaller loan amounts, which could limit the size of acquisitions you can complete.
4. Asset-based loans
These types of loans are secured by the borrower’s assets, such as inventory, accounts receivable, or equipment. They are often used by businesses that have a lot of assets but may not have a strong credit history. Asset-based loans typically have higher interest rates than other types of loans, but they can be a good option for businesses that need quick access to cash.
5. Mezzanine loans
Mezzanine loans are a type of financing that combines features of both debt and equity. They allow buyers to retain control of the business and are best for businesses that have a strong cash flow and growth plan. They offer flexible terms and requirements and can be customized to fit each transaction structure.
How can you qualify for an acquisition loan?
Qualifying for an acquisition loan is the same as qualifying for any small business loan. You will identify a funding need, pick the right funding type for your circumstances, and then choose a lender that specializes in that type of financing. Some of the criteria lenders use to decide whether you qualify include:
Credit: A lender will look at both your business credit report and run a personal credit check for you and any partners. Minimum credit scores will vary, although 640 is the minimum for SBA loans.
Revenue: The lender will examine your company finances to ensure your existing or projected revenue will support the payments required to service the loan.
Down payment: Minimum down payments depend on the loan, but most start at 10% to 15% of the total transaction.
Use of funds: You will have to demonstrate why you are requesting financing, the value of the asset you wish to purchase, and how it will impact the profitability of your business.
Overall, acquisition loans can be a useful tool for entrepreneurs who want to expand their business. However, it’s important to carefully consider the terms and conditions of the loan before taking on the debt, as it can have significant implications for the financial health of your business.
Your Guide Through The Business Landscape
If you’re considering buying or selling a business, Global Business Brokerage is here to guide you through the process. From handling negotiations to ensuring you have all the right paperwork, we’ll prepare you for the next chapter. Schedule a consultation with us.
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