Business Acquisition Loans 101
Business acquisition loans include a variety of financing options. Such as establishing a new business, funding operations, acquiring/expanding a business, or purchasing a franchise/business. In this blog, we’re going to take a look at the advantages vs. disadvantages of these loans, the 4 best types of business loans, and qualifications for getting a business loan.
Advantages vs. Disadvantages of Business Loans
If you are considering a business loan to buy a franchise or acquire an existing business, there are a few things you need to be aware of. First and foremost, you must consider the advantages and disadvantages of a business loan.
Small business loans come with several advantages, including:
• Can be used to finance portions of business not secured by collateral
• Long term solution that can assist during the early years
• Turnaround is usually fast
Of course, it’s also important to note that there are a few disadvantages to a business loan as well:
• Lenders rely on cash flow and credit score
• Interest rates add up
• Some business loans have restrictions and stipulations
4 Best Business Loan Options
There are several ways that you can finance your business acquisition, including non-SBA business loans. The 4 best business loans for acquiring a business are as follows:
• SBA Loans
• Term Loans
• Startup Loans
• Equipment Financing
Qualifying for a Business Loan
If you want to get a loan to acquire a business, it’s important that you know the qualifications you must meet. Be sure to review the following qualifications before you start the application process to determine if this is a good option for you.
• Know the business valuation
When you apply for a business loan, you’ll be asked about the valuation of the business you want to purchase. This is a determination of the company’s worth. This is a significant factor because it helps lenders determine their risk. The higher the valuation, the less risk because there is a greater chance that the loan will be paid back. There are 3 popular ways to calculate business valuation:
• Obtain a signed letter of intent
When you are planning to acquire a business, it’s common for both parties to sign a letter of intent outlining the steps that both parties plan to take to move forward with the arrangement. Depending on the wording, it may not be legally binding but it does prove to lenders that you are serious about the deal. An attorney can help with drafting this letter.
• Check personal & business credit scores
When applying for a business loan, lenders are going to check your personal and business credit scores before they consider approving the loan. They want to be sure that the business owner is reliable about paying debts and want to make sure the business doesn’t have a poor credit history.
• Gather required financial documents
You are going to be required to submit various documents during the application process. These requirements vary from one lender to the next- but here are the most common:
• 2 years of federal income taxes on the business you want to purchase
• Current P&L statement from existing business
• Proposed bill of sale, including terms of sale
• Asking price, with a list of inventory, furniture, and equipment
• Personal background/financial statement
• Projected financial statement, with 1-yr income projection and explanation of how you plan to reach it
• Info about business ownership/affiliations
• Info about business, including certifications and licensing
• Loan application history
• Personal & business federal income tax returns for the past 3 years
• Personal resume for each borrower
• Review of business & history, including the purpose of loan
Choosing Best Business Loan
If you are interested in buying into a franchise or acquiring a business, you’ll see that you have lots of options when it comes to a business loan. When you are weighing these options, be sure to look at all of the factors involved, including repayment terms, restrictions on fund use, APR, and others. After all, there’s more to it than simply meeting the minimum requirements- you must make sure the financing will work for you. When you’re ready to move forward with obtaining your business loan, contact Atlas Capital Solutions.