Business Acquisition Loan

What is a Business Acquisition Loan and How Does it Actually Work?

Starting a business is hard work, and the payoff is anything but certain. According to data from the U.S. Bureau of Labor Statistics (BLS), a fifth of new businesses survive for less than two years, and nearly half have closed their doors by year five. With these long odds, it’s no surprise that some entrepreneurs choose a different route to business ownership and purchase an existing business instead of starting one from scratch.

When you buy an existing business, you get to skip many of the growing pains that startups must endure for years. Instead of spending time coming up with a business plan, conducting extensive market research, choosing a location, and adjusting your product or service until it resonates with your audience, purchasing a business enables you to take the reins of an organization with reliable revenue, a roster of enthusiastic customers, and a more secure future. A smart acquisition allows you to bypass years of struggle where the existence of your business hangs in the balance, but these assurances come at a steeper upfront cost. One way to make it easier to afford a business is to finance the purchase with a business acquisition loan.

So, is a business acquisition loan the best way for you to become a business owner? Read on to help you decide.

How can small business owners benefit from a business acquisition loan?

A business acquisition loan can be thought of like a mortgage, but you’re purchasing a business instead of a property. You can borrow anywhere from $5,000 to $5 million, and term lengths that range from 10 to 25 years offer similar flexibility. Best of all, interest rates are as low as 5.5%, helping keep the overall cost of the loan down and monthly payments to a minimum.

Can a business acquisition loan be a good financing option? Sure, if:

• You know purchasing a business could provide a significant return, but you can’t afford the upfront cost.
• Buying out a competitor is the best way to provide your own business with access to game-changing technology or intellectual capital.
• You want to buy out a partner who is looking to sell his or her stake in your company and spend time on a new venture.

If you’re an aspiring entrepreneur but aren’t ready for the risk of starting a business from scratch, a business acquisition loan can help you buy an existing one. If you already have a business and want to supercharge your growth, buying out a competitor with a business acquisition loan will give you instant access to a bigger team of employees, an additional book of business, and possibly even technology or processes that can revolutionize your operation. Or maybe you started a successful business with two other founders and share equal equity in the organization. If one founder is interested in leaving to pursue a new venture but you and your remaining partner can’t afford to buy the equity outright, you could take out a business acquisition loan to enable the exit and end up owning more of the existing business.

Can a business acquisition loan be a bad idea? Absolutely, if:

• You have no experience running a business and don’t know the industry you’re trying to enter.
• The business you’re purchasing is in an industry experiencing rapid disruption or restructuring that could cause the acquisition to plummet in value overnight.
• You have access to a cheaper way to finance the acquisition.

Maybe you’ve always wanted to be your own boss and work in a different industry than your current occupation. If that describes you, diving in headfirst with an expensive business acquisition might not be the best idea. While the mistakes you make when starting a business can be painful and frustrating, they also teach you valuable lessons about running a business, managing people, and making sound decisions. When you acquire a business, making those same mistakes can be much more expensive, so you need to be sure you’re ready to lead effectively.

Qualifications for a business acquisition loan

How to qualify for a business acquisition loan.

When you borrow money, a lender will look carefully at your own finances to decide if you’re a good investment. That holds true when you’re applying for a business acquisition loan, but most lenders will be even more interested in learning about the business you’re acquiring.

Does the business you’re proposing to purchase have a track record of strong performance? Does the seller’s asking price accurately reflect the value of the business? These are important questions. After all, if the transition goes poorly, the lender will end up owning the business. To help determine the likelihood of success, the lender will also be interested in future projections, as well as your own experience managing and nurturing a business.

Interested in getting the process started? Fill out our loan application and you’ll also see what other financing tools your business could qualify for.

Pros and cons of business acquisition loan.

A business acquisition loan can enable you to take the reins of a fully functioning business, but you should still weigh the following pros and cons carefully before signing an agreement:

If you’re approved for a business acquisition loan, you could get as much as $5 million to fund a purchase—but that amount isn’t a blank check for you to use as you see fit. In many cases, stipulations keep you from spending the money in certain ways, so it’s critical you have a solid grasp on the agreement before you sign on the dotted line.

Our take on the business acquisition loan

Still wondering if a business acquisition loan is a good option for you? It’s a big decision, but here’s our take: An acquisition opportunity alone doesn’t merit a purchase. On the other hand, if you also have the management chops and industry experience to make an existing business even more successful, an acquisition might be the smartest path to business ownership or expansion. Whatever you decide, filling out our loan application form will help you establish all the different financing options available to your small business, ensuring a lack of capital is never holding you back from business success.