Commercial loans help businesses buy other companies. Getting money from lenders to purchase a business is called acquisition financing. These loans let you take over an existing company and make it part of your own. There are a few kinds of commercial loans for acquisitions. Choosing the right one takes research. But finding good financing helps companies grow by acquiring others. This article explains different acquisition loans clearly. It also shares tips for getting the best loan for your needs.
Types of Business Acquisition Loans
When you’re looking to acquire a business, you’ll likely need financing to make the purchase. There are several types of business acquisition loans to consider:
- SBA 7(a) Loans the Small Business Administration partially guarantees and offers loans through banks and credit unions. They feature low down payments, lower rates, and longer repayment terms. Requirements include good personal credit, some cash equity, and a viable business plan.
- Conventional Bank Loans come from commercial banks. They feature faster approvals but higher down payments, higher rates, shorter terms, and stricter requirements. Strong business and personal credit are necessities. Equity of 20–30% is often needed.
- Alternative Loans come from online lenders or specialty finance companies. Approvals can be faster with less paperwork, but rates are often higher. These loans are best for smaller financing needs when speed is critical.
- Owner-Occupied Commercial Loans allow you to buy and operate from the acquired property. Down payments are typically 20–25% with moderate rates and terms. Eligibility depends on your personal credit, assets, income, and property.
- Commercial Bridge Loans provide short-term financing to acquire a business until you arrange for longer-term financing. They usually feature higher rates and fees with faster approvals. Bridge loans are ideal when you find a time-sensitive acquisition opportunity.
Getting Prequalified and Finding the Right Lender
Before shopping for a business, get prequalified with a lender. This shows sellers that you can obtain financing when making offers. Seek out lenders specializing in acquisition financing. Look for competitive rates and fees, streamlined underwriting and approvals, and excellent customer service.
Understanding the Loan Application Process
The process begins with an initial consultation where the lender learns about your acquisition plans. When you find a business, you then formally apply with the required financial documentation.
The lender underwrites the loan, analyzing your credit, assets, collateral, and overall viability. If approved, you’ll receive a preliminary term sheet outlining the proposed terms. Finally, once terms are agreed upon, you’ll close and fund the loan.
Getting Prequalified and Finding the Right Lender
Getting prequalified for a business acquisition loan is an important first step. Prequalification allows you to find out how much money a lender may be willing to lend and the interest rates you may qualify for. This information helps you determine if acquiring the business is financially feasible.
There are a few types of lenders to consider for acquisition financing:
- Banks often offer competitive rates but can have a longer, more difficult application process. Big banks are less likely to provide personalized service.
- Credit unions are member-owned nonprofits. They may offer better customer service and more flexibility than big banks, but they have less money to lend.
- Alternative and online lenders specialize in financing small businesses and startups. They may offer faster approvals and more customized loans, but at higher interest rates.
- SBA-approved lenders provide government-backed Small Business Administration loans that have lower down payments and longer repayment terms. But the application process can be lengthy.
Online lender marketplaces like LendingTree and Fundera allow you to compare loan offers from multiple lenders at once. This makes it easier to find the best rates, fees, and repayment terms for your situation.
Tips for Finding the Right Lender
- Get prequalified before formally applying for a loan
- Shop around and compare rates and terms
- Look for lenders that specialize in financing acquisitions
- Prioritize lenders that offer great customer service and communication
The right lender will make financing the acquisition process smoother. Take the time to research lenders and find one that best fits your needs.
The Loan Application Process Step-By-Step
When you want to buy another business, you’ll likely need to get a business acquisition loan. These special loans help you pay for part or all of the purchase price.
The first step is learning about the different types of loans available:
- SBA 7(a) Loans: These government-backed loans offer low down payments and lower interest rates. You must meet certain requirements, though.
- Conventional Bank Loans: Your local bank may offer business acquisition loans without government backing. Rates may be higher.
- Alternative Loans: Online lenders provide loans quickly but often have higher rates and fees.
- Owner-Occupied Commercial Loans: If you’ll operate in the building you’re buying, these loans can work.
- Commercial Bridge Loans: These short-term loans provide fast financing as you arrange other funding.
Next, get ready to apply by gathering the information lenders will want:
- Several years of financial statements and tax returns for both businesses
- Projections showing combined company performance
- Your credit score and financial statements
- Detailed purchase offer and breakdown of funding sources
When you apply, the lender will review all this and assess if you qualify based on your credit, collateral, and the deal’s feasibility.
The Loan Underwriting Process
Underwriting involves the lender closely evaluating your application using set criteria. This decides if they’ll approve your loan and on what terms.
Key terms include the loan amount, interest rate, fees, repayment timeline, and collateral required. Comparing term sheets from multiple lenders helps ensure you get favorable financing.
The last step is closing and receiving the funds. Read all agreements closely, and be sure you can comply with repayment terms before signing.
Following this process helps your business acquisition loan application go smoothly. Being organized and prepared makes approval more likely as well.
Securing the Best Acquisition Loan Terms
When you want to buy another business, you’ll likely need an acquisition loan. These loans help cover the costs of purchasing the business, so you don’t have to pay for everything out of pocket. There are a few types of acquisition loans to know about when shopping for financing:
SBA 7(a) Loans: The Small Business Administration backs these loans, which banks provide to businesses. They offer low down payments and interest rates.
Conventional Bank Loans: Banks provide these business loans without SBA support. They may have higher down payment requirements than SBA loans.
Alternative Loans: Online lenders provide these loans quickly, but often at higher interest rates.
Owner-Occupied Commercial Loans: These loans are for purchasing a property for both business and personal use.
Commercial Bridge Loans: These short-term, high-cost loans provide fast financing while waiting on other funding.
Before applying for an acquisition loan, get prequalified to see potential loan amounts and interest rates. This shows lenders you are serious. When picking a lender, find ones specializing in acquisition financing. Seek low rates and fees, fast processing, and great customer service.
Comparing Business Acquisition Loan Options
As you review loan choices, look at these key terms to find the best fit:
- Loan amount: Make sure it covers the full purchase price and closing costs.
- Interest rates: the lower, the better to reduce total repayment costs.
- Loan term length: longer terms have lower monthly payments but higher overall interest.
- Collateral required: Will personal assets need to be put up as security?
Also confirm all fees, prepayment policies, amortization schedule, loan covenants, reporting requirements, and ongoing capital requirements before committing. Understanding these terms upfront helps secure favorable financing and reduces unpleasant surprises later on.
Tips for Getting the Best Deal
Here are some quick tips on securing the best acquisition loan for your needs:
- Get quotes from multiple lenders
- Be ready to provide financial statements and business plan
- Highlight experience in the industry
- Put down 20% or more as a down payment
- Seek a fixed interest rate
- Opt for longer repayment terms
Taking the time to research different acquisition loan options, get prequalified, and compare terms sets you up for getting ideal financing at reasonable rates. This makes the business purchase process smoother and more affordable.
Financing Your Business Growth
Acquiring the right financing can unlock your business’s full potential. With an acquisition loan tailored to your needs, you gain the capital to take advantage of growth opportunities. Now is the time to get prequalified with a specialized lender offering competitive rates and streamlined approvals. Their experts can walk you through loan options to find the best fit.