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.
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:
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.
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.
Given the more significant loan amounts and more complex nature of funding a business purchase, lenders have stricter requirements for business acquisition loans:
Financing a business acquisition is more challenging than getting a small business loan. You must convince lenders:
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.
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.
The basic steps to securing acquisition financing are:
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.
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.
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.
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.