Are you looking to make a name for yourself in business? If you are determined to succeed, but lack the necessary capital, a business acquisition loan may be the solution. But what exactly is it, and how does it work? More importantly, why should you consider this type of loan?
We answer all these questions and much more. Find out all you need to know about small business acquisition loans, right here.
What Is a Small Business Acquisition Loan?
Let’s start with the most basic questions: What is a small business acquisition loan, and how does it work?
Used to Purchase an Existing Business
A small business acquisition loan is used to buy a business. Do you want to purchase an established, small-to-medium-sized business, or open a franchise, rather than building a company from the ground up? Then, this is the type of business loan you’ll need.
How Does It Work?
How does this type of loan work? You can get a business acquisition loan from the same places you get most business loans — traditional banks and credit unions. But you can also get one online, through a platform that arranges easy access to loans and credit, like E-Boost Partners.
Why Consider a Business Acquisition Loan?
Does it differ from other types of business loans, for example, a traditional business loan? To answer this question more fully, let’s look at how the two compare.
A traditional business loan can be used for various business needs. You could use it to buy a small business or franchise, start your own small business, or expand your existing business. You could also use it as working capital. The loan amounts and repayment terms can vary widely depending on your needs.
It Can Be Easier to Qualify For
Where you apply for a business loan will also play a role in how easy it is to qualify for it. Banks typically have higher and more stringent requirements to qualify for a business loan. That is why you might consider applying for a business acquisition loan instead of a traditional business loan.
Often, the conventional route of going to a bank won’t be successful especially if this is your first step into the world of business. Unlike an established business, you have no proof of your business acumen. Banks may see you as a high risk, and you may not meet their qualification criteria.
It Is Specifically Designed for Business Acquisition
A business acquisition loan is specifically designed to finance the purchase of an existing business, rather than start or expand on a new one. Because purchasing a business often requires a substantial amount of money, these types of loans may offer larger loan amounts and longer terms.
In the case of a specialized business acquisition loan, the acquired business itself often serves as collateral, along with any other high-value assets you may have. However, depending on the type of business acquisition loan sought, this is not always the case.
Types of Business Acquisition Loans
Different loan types can fall into the category of a business acquisition loan. Here are the seven main options:
Small Business Administration (SBA) Loans
One common type of business acquisition loan is an SBA loan. This is a small business loan that, while issued by a private lender, is backed by the federal government. An SBA loan can be used for starting a business, buying a business, as cash flow in your existing business, expanding a business, and more.
Therefore, an SBA loan can be used for both business acquisitions and existing business needs. SBA lenders offer various types of loan programs to meet these different needs. The most relevant to acquisition financing is the SBA 7(a) loan.
It provides up to $5 million in funding and offers long repayment terms. This makes it suitable for large purchases. Key eligibility factors that SBA lenders look for include: what the business does to receive its income, where the business operates, and your credit history.
Term Loans
A term loan is a business acquisition loan you may already be familiar with. It is a traditional loan that involves you receiving a lump sum upfront, which you then pay off over a set period or term. This can be anywhere from a year to 25 years.
Monthly repayments include both a part of the principal sum and interest on that sum. The interest rates on term loans are often fixed, which means they are always the same amount, every month. However, they can also be variable, meaning they may fluctuate depending on market conditions.
Term loans can be used to finance business equipment, purchase a business or real estate, and even as working capital in your business. Loans may be secured, or unsecured. When they are secured, they involve putting up collateral to reduce the lender’s risk. This may improve your repayment terms.
At E-Boost, we facilitate access to working capital and short-term loans of $5K-$2M.
Equipment Financing
An equipment financing loan is a very specific type of business acquisition loan that is more like a short-term business loan.
It can be used for purchasing equipment necessary for the business you’re acquiring. In some instances, the equipment bought may also serve as collateral for the loan. Bear in mind this means that the much-needed equipment could be seized to recoup losses, should you default on the loan repayments.
Rollover for Business Startups (ROBS)
Perhaps you have significant retirement savings but lack other sources of capital. If that is true for you, you may consider this as your business acquisition loan option.
ROBS is not technically a loan. It lets you use your retirement funds to finance a business acquisition or start-up. However, consulting with a ROBS provider may set you back several thousand dollars in setup fees.
To qualify for ROBS, the business you are acquiring must be structured as a C-corporation. You must create a new retirement plan for the C-corp, typically a 401(k). Your existing retirement funds must then be transferred into the new retirement fund before being used to purchase stock in the C-corporation.
ROBS allows you to use part of your retirement funds without incurring early taxes or penalties related to early withdrawal. However, such a decision is often a last resort, and should not be taken lightly. If the business fails, you stand to lose your invested retirement funds.
Any time you use retirement funds for something other than, and before, retirement, seek professional guidance. Be aware that the IRS also closely monitors ROBS arrangements.
Seller Financing
With a seller financing loan, the seller of the business you wish to acquire provides you, as the buyer, with a loan to cover part of the purchase price.
This is not as common as other types of business acquisition loans. However, it’s a flexible option that often involves more favorable terms. Because the seller has a vested interest in the business’s success, they are more likely to be accommodating when discussing affordable loan repayments.
Lines of Credit
A line of credit provides you with more flexible access to your funds up to a certain limit. This type of loan is sometimes offered by online lenders and can be used to finance various business needs, including acquisitions. Funds can be accessed whenever needed for the running of the newly acquired business.
This is a revolving credit limit, with interest only payable on the amount that you have borrowed from the line of credit. These interest rates are commonly variable, changing with market conditions. Annual fees, or withdrawal fees, may apply.
Like term loans, lines of credit may be secured, or unsecured, with secured lines of credit offering lower interest rates and potential higher credit limits. Approval times are often much faster though, than they are for other types of loans.
This is another one of the services you can access at E-Boost Partners. We can help you access lines of credit and other small business financing solutions. Our lines of credit allow businesses to access their funds as needed.
Alternative Business Loans
These loans are alternatives to traditional bank loans and operate outside of the banking system. They include options such as peer-to-peer (P2P) lending and debt-based crowdfunding.
These types of loans involve borrowing money from individual investors through online platforms. The loans these online lenders offer can be used for small business marketing, working capital, or expansion, but are typically used for startup capital.
You may receive all you need from one individual, but these platforms often allow for smaller amounts from multiple investors. Collectively, these smaller contributions help you to meet your funding goal. You could be approved much faster than with a traditional bank, and receive more favorable repayment terms.
Pros and Cons of Business Acquisition Loans
Like anything, a business acquisition loan has its pros and cons.
Pros
- Access to capital that you otherwise would not be able to raise, to acquire a business.
- Different types of business acquisition loans to choose from. This offers you more flexibility to find the type of loan arrangement that works best for you.
- Some types of business acquisition loans have simpler small-business loan requirements than other more traditional loans.
- Interest payments on your business acquisition loan may be tax-deductible.
Cons
- Any type of loan, including a business acquisition loan, increases your debt burden. While you are trying to make a success of the business you have acquired, your loan repayments can impact cash flow significantly.
- Loans often require collateral, to mitigate the lender’s risk. But this can put your assets at risk if you default. For example, if you take a loan to buy equipment, and the equipment is the collateral, you may be left without the equipment you need should you default.
- Securing a business acquisition loan is often quick and straightforward, but it can just as easily be a lengthy and drawn-out process. Much of this depends on where you get the loan, and what type of loan it is.
- Some business acquisition loans, particularly alternative ones, have a simple application process, with everything handled online. However, be prepared for intensive business valuation and financial scrutiny. This is necessary to determine your trustworthiness and ability to repay the loan.
Conclusion
A business acquisition loan is specifically designed to help you purchase a business or franchise.
Some types of business acquisition loans are much like traditional loans which can be used for both acquisition and other business needs. However, application and approval times can vary widely, as can terms, interest, and other criteria.
E-Boost Partners can help you to access working capital in the form of short-term loans, and lines of credit to small businesses and budding entrepreneurs. We also provide online banking and merchant services to make running your business and managing your funds easier.
After registering on our platform, all you have to do is fill out a five-minute online application form. If approved, you will receive your funds within 24 to 48 hours. Need to know more? Contact us today for detailed information and advice.
