Business Acquisition Loan Requirements
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Business loans are a type of financing offered by lenders to startup, growing, and established businesses for their day to day operations.
Lenders issuing this type of funding require repayments of the principal amount loaned out, and interest including extra fees charged.
The loan payments are to be made on set terms and duration. Interest rates and terms will vary depending on the lender chosen.
To apply for a business loan, you need to fill out and sign the provided loan application form, upload or attach additional required documentation.
Then submit your application and wait for review. You will get a loan upon approval.
What Is An Acquisition Loan?
An acquisition loan is a commercial cash advance loan given to a borrower by an approved lender to help in purchasing a business, equipment, and or property.
Acquisition loan can be used to offset the costly and stressful process of acquiring another company or small business.
The loan helps to take advantage of a business opportunity. The borrower enjoys the benefits of being a business owner even if they lack adequate funding to buy it.
Alternative Loans
Alternative lenders are an option for those who may not be able to qualify for bank and SBA loans.
They have lower requirements and grant access to more business acquisition loans with bad credit or no collateral.
The main drawbacks of alternative business financing is the higher interest rates which may double normal SBA loan rates.
Startup Loans
Business acquisition loans for startups or first time borrowers, are hard to get due to the many stringent requirements by most lenders.
Most lenders will ask for current and past income statements during the underwriting process and scrutinize personal finances.
They may also ask for a down payment on the loan of up to 20% or more, and inclusion of personal assets as collateral for the loan.
Types Of Acquisition Loans
Term Loans
This is the loan that most clients seeking business acquisition loans often think of first due to its great benefits.
Term loans are amortized with even payments at a set interest rate over a term length.
The loans offer more attractive term lengths of more than 5 years, large loan amounts, and low monthly down payments.
It suitable for acquisition of small businesses.
The rate of interest is also low when compared to other available loan types.
Loan requirements are quite strict and having an excellent credit score, and valuable assets to use as collateral may help you secure such a loan.
Short-Term Loans
Short term loans are an alternative to borrowers who cannot qualify for normal term loans.
They have a higher interest rate and short repayment period of less than 2 years.
This minimizes default rates and is a fit for borrowers with bad credit.
SBA Loans
Small Business Administration (SBA) loans are for business owners who are not able to qualify for term loans.
The SBA acts as a guarantor by backing a portion of the loan in case a borrower is unable to repay the loan.
SBA business loans are normally advanced through approved lenders via the SBA 7(A) loan program.
This mitigates risks for the lenders and allows borrowers to access funding of up to US$5 million repayable for term lengths ranging from 5 years -25 years depending on the usage of the loan.
Loan requirements are quite strict and you must have a better credit score of more than 680, and assets to use as collateral for the loan in case you default in payment.
Interest rates for SBA loans are capped at a percentage over the current prime lending rate, to control costs.
Requirements For Business Acquisition Loans
Though the process of business acquisition loans are tedious, it is important to be informed about the requirements lenders look for during the underwriting process of the loan application.
This may help improve your chances of getting funding if your loan application meets the basic minimum requirements outlined by the lender.
Personal Credit Score
Personal credit scores are essential to approval rates of most loans especially for startups.
A good credit score can enhance your loan approval chances since most lenders are not only funding your business, but you as the owner running the business too.
Lenders view a good credit score as a great indicator of your ability to handle the finances of your business well and be able to repay them.
Since most startup businesses don’t have a credit history, the owner’s credit score is quite important to this process.
Business Credit Score
Having a good business credit score shows your ability to handle business loans, credit cards, and vendor accounts.
This shows a potential lender that you can pay off your loan.
If you get approved for an acquisition loan with bad credit, expect to pay higher interest rates.
Tax Returns
Tax returns both personal and for business is another key information lenders look at when reviewing business loan applications.
This is for verification of your personal income and any revenues generated by your current business.
Lenders require up to 3 years of tax returns and a detailed updated financial statements for easy approval process.
Bank Statements
Most lenders need a bank statement showing a positive cash flow and savings when applying for a loan.
Financial Statements
It is good to have a detailed financial statement that includes; a balance sheet, profit and loss statement, and cash flow statement during your loan application.
Evaluation Of Your Business Acquisition
It is important for lenders to review your proposed business acquisition before giving you the funds to acquire the same.
A proper evaluation of the business is crucial to see whether the new business venture will generate enough income to enable you to pay back the loan.
Lenders want a guarantee that the business loan is being used to fund a viable and profitable business.
Letter Of Intent
A letter of intent is a document that shows an agreement between you and the seller of the business you want to buy with regards to the proposed transaction.
Most lenders will not review a loan application without a letter of intent.
Business Valuation
The amount of loan you will qualify for will depend on an independent valuation of the true worth of the business you want to acquire.
An updated and accurate valuation taking into account past, current, and predictable future performance of the business by a third-party business valuation expert, is usually recommended.
Business Financial Statements
Most lenders will want to have a look at the financial statements of the business you want to acquire to assess the risks of the financial investment.
You need to convince the seller of the business to provide you with the same financial statements as your own including tax returns and bank statements, for submission to the lender with your loan application.
Profit Margins
Expected profit margins with the new business acquisition can help or decrease your chances of getting a loan approval.
A potential business with high profit margins, can enhance your chances of getting quick approval for financing.
Personal Evaluation
Most lenders prefer to fund a business acquisition that is run by personnel well versed in the industry.
It is important to have the ability to run a business successfully and your expertise or proof of it to a lender may help you get the loan.
Business Plan
To improve your chances of getting the loan approved, you need to have a good outlined business plan with regards to the business acquisition.
You need to show detailed plans you have for the new business, how you intend to make it profitable, and have a strategy in place to make it a success and repay the loan.
Related Experience
Though relevant experience in the business is not a necessity, it can enhance or hinder your chances of getting a loan approval.
It makes sense to venture into a business closely related to your current industry or prove that you have personnel well versed in the industry of the new business undertaking.
This may help the lender make a decision in your favor especially with the risks involved.
Value Addition
Value addition is important. If you can prove to a lender that you have the necessary skill, plan, and personnel ready to transform and improve upon the new business acquisition, they may easily buy into your ideas and give you the funding you need.
Convince the lenders that you can turn around a business in case you want to buy into a failing business, or increase the revenue of an underperforming company.
Through a single online application, you may be able to get multiple funding offers, leaving you with the option of choosing the right lender for your business.
Business Acquisition Loan Process
Before you even consider making an application for a business acquisition loan, you need to have all the necessary documents, and know exactly the amount you are seeking.
You stand a better chance of getting a large loan amount if you are well organized, and have answered all questions a lender may have with regards to your loan application.
A poor impression and failure to correctly answer questions that are asked during the loan application process may hurt your chances of getting an approval.
Whether you are applying for an SBA loan, bank term loan, or any other loan, get your facts in order and present the best of yourself and knowledge of what you want.
An online application is your best chance to get your loan request in front of multiple lenders who can help with your business acquisition loan all at the same time.