Business Acquisition Loan: Best Options and How to Get One

An acquisition loan helps you buy an existing business. Both traditional and online lenders offer business acquisition loans.

A business acquisition loan allows you to finance the purchase of an existing business or franchise. You can also use this type of small business loan to purchase specific assets of an existing business, such as equipment, as well as to purchase partners in your existing business.
Business acquisition loans are available from banks and credit unions, as well as SBA and online lenders. If you have bad credit or limited experience as a small business owner, it can be difficult to get a loan to buy a business.
Below, you’ll find our picks for the best business acquisition loans and more information on how to qualify for financing.

How do business acquisition loans work?

Business acquisition loans are generally structured as term loans, where you repay the borrowed funds, with interest, over a set period of time. Loan amounts, interest rates, and repayment terms vary by lender.
Although you can request a specific loan amount, some lenders will only offer you a percentage of financing and require you to provide the remaining percentage as a down payment. Down payments on business acquisition loans can be as low as 10% or as high as 30%, depending on the type of financing, the lender, and the qualifications of your business.
Lenders generally rely on a business valuation, an assessment of the economic value of the company you are seeking to purchase, among other factors when determining the amount of the loan to offer.
Collateral may also be required to secure your financing. In some cases, tangible assets of the company you wish to purchase may serve as collateral for the loan.
Pros and cons of a business acquisition loan

Advantages

Lower the upfront costs associated with your acquisition. Instead of relying solely on your existing capital reserves or personal savings, a business acquisition loan can help cover some of the costs associated with buying another business. You can use these funds as needed and repay them over time. In addition, these loans often have longer terms and a monthly repayment schedule, making it easier to manage payments as you develop your new business.
Collateral requirements can be flexible. If you are hesitant to put your physical assets at risk, some acquisition loans may not require collateral. SBA 7(a) loans, for example, do not require collateral for loan amounts less than $25,000. In addition, equipment financing typically does not require collateral because the equipment itself serves as security for the loan.

Cons

Can be difficult to qualify for. Because you are seeking a loan to purchase from another company, lenders want to see that you are reliable, experienced, and have the ability to repay your debts. As a result, they often require you to have good credit, solid finances, and an established business background. Many lenders also require a down payment, and some require collateral, although this is not always the case. Some lenders may be willing to work with borrowers with bad credit, but will also charge higher interest rates.
Interest costs can affect your bottom line. While you can use your business acquisition loan to cover the costs of buying and running another business, you will also have to make payments, including interest, as you try to get started. These interest costs can add up quickly, especially if you have difficulty maintaining a steady cash flow. And loans with higher interest rates can make it even more difficult to manage payments along with the additional upfront costs.

Where to get a business acquisition loan

Business acquisition loans are available through a variety of sources, including:

Banks and credit unions

Banks and credit unions may offer acquisition loans with low-interest rates and long terms for businesses that can qualify and do not need cash quickly.
To qualify for a commercial bank loan, you will generally need strong personal credit (a score of 700 or higher), several years in business, and excellent financials. Not all banks or credit unions require physical collateral, but offering this type of collateral can help you access larger loan amounts and lower interest rates.
However, these small business loans can take time to fund and often require lengthy application processes.

SBA Lenders

SBA loans are issued by participating lenders, usually banks and credit unions, and are partially guaranteed by the U.S. Small Business Administration. These loans have flexible terms, low-interest rates and can be used for various types of business acquisitions. However, like traditional bank loans, SBA loans have strict requirements and can take time to fund.
To qualify for an SBA loan, you will typically need solid annual income, at least two years in business, and a personal credit score of 690 or higher, although some SBA lenders may have lower credit score requirements.
You may also be required to provide a down payment of at least 10% of the total loan amount when using an SBA loan for a business purchase. In some cases, you may be required to provide additional collateral.
Standard SBA 7(a) loans can take anywhere from 30 days to a few months to fund. Alternatively, SBA Express loans offer faster funding time, but also have smaller loan amounts and slightly higher interest rates.

Online Lenders

If you need faster funding or don’t qualify for a bank or SBA loan, consider a business acquisition loan from an online lender. Online lenders such as Funding Circle and Credibility Capital offer acquisition loans in amounts up to $500,000 and terms up to seven and five years, respectively.
Online lenders generally have less stringent requirements compared to banks and credit unions. You may be able to qualify for a business loan with fair credit (a FICO score of 630 to 689), and you may not be required to provide physical collateral. Online lenders are also more likely to work with less established businesses, especially if they have strong financials.
And while bank and SBA loans can take weeks to fund, online business loans can often fund in just a few days. Credibility Capital, for example, can offer funding in as little as three days. Online lenders generally charge higher APRs than traditional lenders – the trade-off for easier and faster approvals.

Alternative options for business acquisition financing

If you are looking to buy a business, you may have financing options in addition to traditional term loans, such as:
Equipment financing. If your business acquisition includes equipment, you may be able to use an equipment loan to finance part of your purchase. Or if you are buying a business that relies heavily on equipment, such as a construction business, you can find an equipment loan to cover most of the costs. With equipment financing, the equipment itself serves as collateral for the loan.
Seller financing. With seller financing, you are borrowing the capital you need to buy the business directly from the current owner. You work with the owner to create an agreement regarding terms and interest and then pay the owner directly. This type of arrangement may be easier than working with a third-party lender if the seller is willing to offer it.

How to obtain a business acquisition loan

Check your qualifications

Each lender has different eligibility requirements, but they generally use similar criteria to endorse your business for a loan, including your personal credit score, annual income, and time in business. Lenders also consider your cash flow, ability to repay the debt, and the collateral you can offer.
You should review these standard business loan requirements to get an idea of where you stand before you apply.

Prepare your acquisition information

When acquiring an existing business, lenders will also consider the value of the business you wish to purchase, the down payment you can provide, your business plan and financial projections for the acquisition, as well as your industry experience.
It is important to prepare any acquisition information in advance to help expedite your loan application. You should perform a business valuation, if necessary, and have documentation detailing the estimated value of the company you wish to purchase. You may also want to obtain a signed letter of intent with terms of sale between you and the current business owner.
You may consider working with a business accountant and a business attorney to assist you in this process. These professionals can help you evaluate the costs of buying a business, perform a business valuation and draft important documents related to the acquisition.

Complete your application

As part of the application process, you will need to provide financial documents such as cash flow statements, profit and loss statements, tax returns, and business and personal bank statements.
The lender will likely request additional documentation, such as:
Financial statements for the business you are buying.

A business plan

Post-purchase sales projections.
Proof of collateral and/or down payment.
A business valuation of the business you are purchasing.
A letter of intent with terms of sale between you and the current business owner.

Find more business loans

To look beyond business acquisition loans, check out FundingHall’s list of the best small business loans to view and compare options.
Our recommendations are based on market reach and lenders’ track records, business owner’s needs, and an analysis of rates and other factors, so you can make the right financial decision.