Purchasing an existing business or franchise can be an overwhelming process. This type of business venture is often time-consuming and complex, and you’ll want the right person helping you so you make all of the right decisions. First, you need to figure out how to finance it. Keep in mind that external financing is the tool that can make this possible, as it will cover various expenses involved. A business acquisition loan could be exactly what you need to grow, and that’s why having a great broker is essential to do this process the right way.
What are Business Acquisition Loans?
Small business acquisition loans can be extremely helpful when it comes to financing this kind of business move. This kind of loan has a broad purpose and can help you with doing things like purchasing equipment to providing working capital for daily expenses. This loan is designed specifically for financing the purchase of a small business or franchise. If you are the owner of a small business, you could also use this kind of loan to finance a buyout of one or more of your partners.
Of course, the amount of money that you can borrow depends on the lender. However, in comparison to other types of loans, business acquisition loan policies are usually more laid back than others.
Types of Business Acquisition Funding
There are four specific financing options you could use to acquire a business:
- Small Business Administration (SBA) loans.
- Term loans.
- Startup loans.
- Rollover for Business Startups (ROBS).
It is important to understand how each one of these types of funding compares to which type of loan you plan on getting. These two elements combined will be the backbone of your business plan and will dictate what you can afford. Let’s take a look at each one.
Small Business Administration Loans
The SBA is not a government agency that partners with banks and lenders to secure loans granted to business owners.
There are quite a few SBA programs available to business owners but 7(a) loans are typically best suited for business acquisition. A 7(a) loan can offer up to $5 million in funding, at great interest rates.
Term Loans
With a term loan, you can get a lump sum of capital and repay it at fixed installments over your allotted time period. Startup Loans Startup loans are made for new entrepreneurs who are in the early stages of launching a business. Purchasing a business or franchise that already exists is considered the early stage of launching a business.
A startup loan is similar to a term loan but they may be easier for new business owners to qualify for. For example, a term loan might require you to have at least two years in business, but a startup loan may only require six months of financial records.
Rollover for Business Startups (ROBS)
Rollover for Business Startups (ROBS) allows you to access funds from your retirement account to invest in a new business.
Pros and Cons
There are both advantages and disadvantages involved in getting a business acquisition loan.
Pros:
- These loans can make it possible to expand your business quickly.
- Longer repayment terms can create accommodating monthly payments.
- Collateral isn’t necessarily a requirement for approval.
- Borrowers with good credit will benefit from low interest rates.
Cons:
- Some of these loans can be exceptionally difficult to qualify for.
- Lenders typically expect you to have a down payment ready.
- You may not qualify for the full amount of funding you need.
Purchasing a Distress Business
A distressed business is one that is at risk for failure. There are some distressed businesses that are beyond help, while others are considered “good” distressed businesses which would be a positive purchase. A “good” distressed business is one that once in the hands of the new buyer, will have new life and new solutions to problems. The purchaser of a distressed business has to be in the business’ niche and has to feel confident about making the purchase. Purchasing a “good” distressed business can be a great career move as long as everything falls into place.
Is Acquiring a Business the Right Move?
As a potential business buyer, you may be wondering if this is the best move for you. There are so many factors that come into play when making this decision. When making this choice, think about the revenue you are looking to make, and consider if this business will make that amount. Think about if this is the right niche for you and if this is the right time in your life to make this purchase. Do you have the time and knowledge to dedicate to this business to ensure it is successful? In the end, listen to your gut — only you know what business move is right for you.
For more information about financing the purchase of your next business or if you need help getting started, contact us today.