Business Acquisition Loans & Financing
Business Acquisition Loans:
For entrepreneurs and business owners, acquiring an existing company can be a fast and strategic pathway to growth. However, these deals require significant capital that is often difficult to access through conventional financing.
A business acquisition loan provides the funding needed to purchase a portion or all of another business successfully. This guide explains business acquisition loans, their benefits, qualifications, and how to get approved with the help of lenders like Sunwest Bank.
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What is a Business Acquisition Loan?
A business acquisition loan, or acquisition financing, is specifically designed to finance the purchase of an existing company, either whole or partially. These loans provide capital to:
- Buy out a partner or owner’s shares in a company
- Purchase a competitor business in your space
- Acquire a supplier, distributor, or other strategic asset
- Absorb a smaller firm to expand your operations
The funds can cover the valuation of tangible assets like equipment, real estate, and intangible assets, including client lists, trademarks, and goodwill.
A dedicated business acquisition loan product for funding acquisitions is crucial, as most conventional small business loans cannot be used. At Sunwest Bank, our experienced team offers custom acquisition financing up to $15 million to help entrepreneurs and business owners complete strategic purchases to grow their company.
Benefits of Business Acquisition Loans
There are many strategic reasons why acquiring an existing business can accelerate growth compared to starting a new company. A business acquisition loan helps fund these opportunities through financing advantages like:
Immediate Revenue and Cash Flow – Buying a business with an established product, customers, and cash flow provides instant income streams. This cash flow also helps repay acquisition loans.
Gaining Market Share – Purchasing a competitor lets you absorb their market position.
Expanding Offerings – Acquiring a company in a complementary space allows you to diversify your products and services.
Adding Capacity – Buying a supplier, distributor, or other strategic partner gives you more resources and bandwidth.
Attracting Talent – Acquiring an existing business includes retaining key staff with operational experience.
Proven Concept – An operating company has resolved product development and market issues that startups face.
With these strategic benefits, it is easy to understand why business acquisitions can be attractive. The key is securing an acquisition loan to finance the right opportunity.
Business Acquisition Loan Requirements
Given the more significant loan amounts and more complex nature of funding a business purchase, lenders have stricter requirements for business acquisition loans:
- Strong personal credit history with scores in the 700s.
- Several years of experience operating a business successfully.
- Solid revenue and cash flow.
- Significant equity and capital invested, often 10-30% of the purchase price.
- Quality business plan detailing the strategic rationale of the acquisition.
- Strong post-acquisition financial projections showing repayment ability.
- Collateral in the form of business assets and often personal assets and guarantees.
Expect the underwriting process to be extensive, scrutinizing you and your business’ financials. Lenders want to see major skin in the game from you and a prudent valuation.
Working with an experienced lender and SBA partner like Sunwest Bank can help you organize the necessary information and put your best foot forward to get approved for your business acquisition loan.
Are Business Acquisition Loans Hard to Get?
Financing a business acquisition is more challenging than getting a small business loan. You must convince lenders:
- You have the experience and capability to integrate a new company.
- The valuation and purchase price makes sense.
- The combined business will be profitable and cash flow positive.
It requires thorough financial and operational analysis plus risk assessment by lenders. Their key question is, “How will acquiring this business strengthen your company?”
Bringing solid answers to these concerns and a prudent valuation and equity investment as the buyer helps ease the process. Working with established businesses also helps versus acquiring a distressed asset.
While challenging, thousands of entrepreneurs get approved each year for acquisition loans. Come prepared with quality financials, projections, and collateral, and work closely with an experienced commercial lender like Sunwest Bank to give yourself the best shot.
What is Needed to Qualify for a Business Acquisition Loan?
Given the detailed underwriting required, you must be ready with a complete package to qualify for a business acquisition loan. Lenders review several vital items, including:
Financial Documents – Multiple years of tax returns and financial statements for both businesses. Forecasts showing that the acquiring business has a solid plan, including expected post-acquisition performance.
Collateral – Strong identifiable business assets that can be pledged. Personal collateral may also be required if the business’s assets are insufficient.
Equity Investment – 10-30% cash injection of the upfront purchase price
Cash Reserves – Funds remaining after the down payment to help operate if cash flow is delayed.
Business Plan – Detailed strategic explanation and integration plan demonstrating long-term viability.
Valuation Support – Documentation justifying the purchase price, such as appraisals, business valuation reports, discounted cash flow analysis, and synonym analyses.
Term Sheets – Proposed terms from the seller with deal structure details.
Bringing this polished package demonstrates you have conducted due diligence and are ready to move forward. This gives lenders confidence in your acquisition’s success.
How Do You Get Financing for a Business Acquisition?
The basic steps to securing acquisition financing are:
- Find an Opportunity – Identify potential companies to purchase that align with your goals. Work with a business broker and M&A advisor.
- Submit Offer Letter – Provide a non-binding letter of intent to the seller outlining proposed deal terms and conditions.
- Interview Lenders – Meet with multiple lenders – banks, credit unions, SBA lenders, and alternative lenders to discuss financing options.
- Choose Best Loan – Select the lender providing the most favorable loan terms and experience with acquisition financing.
- Formally Apply – Work with your loan officer to complete the credit application and provide needed financial documents.
- Get Approval – The bank will underwrite and make an official credit decision on your application.
- Close and Fund – After finalizing the purchase contract with the seller, close on your financing and complete the acquisition of the new business.
Depending on diligence, the process takes as swiftly as 30 days, typically 60-90 days. Working with a lender like Sunwest Bank, who is experienced in funding acquisitions, helps navigate each step.
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What is the Best Financing Option for a Business Acquisition?
There are several business acquisition financing options for the small business owner, each with pros and cons:
Bank Loans – The most common source, banks like Sunwest provide customized acquisition loans up to several million. This loan type requires strong qualifications.
SBA Loans – SBA 7(a) and 504 loans help small businesses finance purchases with lower down payments; however, an SBA loan can take 3-6 months to fund.
Alternative Loans – Fintech lenders offer faster online loan decisions but with higher rates and lower loan amounts.
Business Credit Cards – Easy for small business owners to get but practical for only micro-acquisitions under $50,000.
Rollovers for Business Startups – Allows using 401k funds penalty-free but requires repayment within five years.
Owner Financing – Seller carries some debt, enabling easier bank approval but adds risk if defaulted.
Peer-to-Peer Lending – Sites like LendingClub provide business acquisition loans up to $500K quickly but with high-interest rates.
Contact Sunwest Bank for Acquisition Financing
Whether you are purchasing a small competitor or an enormous strategic asset, we can provide customized business acquisition loans and lines of credit to help you complete the right deal. Our full suite of cash management, treasury, international, and other services supports your business before and after the acquisition.
For a complimentary consultation with our specialists, contact Sunwest Bank today to explore your business acquisition financing options.