Business Acquisition Loan Basics: What You Need to Know About Buying a Small Business

Buying over an existing small business is a huge commitment. Here’s how to navigate the decision with gumption.

If there’s one thing Gordon Ramsay’s Kitchen Nightmares has taught us, it’s that investing in an existing small business is always daunting and a downhill journey. For context, cue the episode where a couple got out of retirement and put their life savings on the line to purchase a restaurant that only shut down a couple of years later; it sounds like quite the ghastly nightmare – but it doesn’t have to be. 

Acquiring an existing business with hopes in your heart and dreams twinkling in your eyes for its brighter, better future is a feeling one can’t explain. However, while we can romanticize this thought all we want, the decision is taxing. It can burn a hole in the wallet. 

A business acquisition is something to consider during this time. The term – ‘loan’ is something that looms large over people’s heads, as it is a term that’s often associated with financial debt. However, it can sometimes be a blessing. We’re here to bust some myths about business loans, tell you why they aren’t taboo, and explain why they’re the best route for you to tread if you’re considering acquiring a small business. So what’re you waiting for? Hold on tight, and let’s dive right in.

What is a Business Acquisition Loan?

The term business acquisition loan is self-explanatory; however, let us elaborate more. This term is an umbrella term for the financial aid you can receive to purchase another functioning business. Suppose you’re a company looking to buy over another small business. In that case, a business acquisition loan is your best bet. 

This loan is usually granted to a company seeking financial aid to purchase a particular asset or gain ownership of another business. In most scenarios, a company can use this loan only for a short period and is capped at 90% of the acquired business value. Lastly, it can only be used for the purpose that was agreed upon at the time of granting. 

What are the different types of Business Acquisition Loans?

Fun fact: There isn’t just one, but very many types of acquisition loans, such as secured-term loans, SBA loans, asset lending loans, private debt, and mezzanine debt, to name a few. Here’s a little explainer on each to help you get acquainted. Each explainer is written as a ‘Who Am I,’ ’so that it’s easier to take in:

• Secured Term Loan: 
• I sometimes go by the alias Senior Debt Loan because I often take precedence over other unsecured debt. I am that loan in which lenders are given priority and will receive money before anyone else owed money can queue up for their due if your business were to fail. 

Lenders usually offer fixed or flexible interest rates for a certain period. Whether the loan is asset-based or cash-flow only is the lender’s discretion. 

• SBA Loan:
• I’m the least risky of the lot! I’m supported by the SBA (Small Business Administration) for up to 85% of the loan; those folks have got the lenders back. Due to this sense of security for the lender, borrowers get a better deal. They’re granted better interest rates and more oversized payment windows, allowing them some room to breathe. The SBA also looks to safeguard the lender’s interest and the borrowers by putting a rigorous framework in place to help borrowers find the right lender. Which ensures a guiding hand through the whole process as they tread along.

• Asset-Based Lending Loan: 
• I am the most common type of loan that people understand. I allow a borrower to put up an asset against the capital borrowed from the lender.

• Private Debt:
• I’m not private in terms of, ‘let’s not tell anyone about this guy,’ instead, I’m that loan offered to a company by a loan shark rather than a bank. I’m often granted when a company struggles to obtain debt financing from someone else, so I’m rather expensive.

• Mezzanine Debt: 

• I’m pretty high-risk in nature. I can be converted into equity in the company if the borrower cannot pay off the lender. While some people may like the Taste of Thunder, it’s not for the lender’s palate; hence, these are high-interest, interest-only loans. 

Tell us how Escalon’s FinOps can help gain financial insights to make informed decisions.

A ’you-should-know-this-as-a-borrower’ guide

Procuring a business acquisition loan is far from a walk in the park. It is complicated to get, as private lenders and banks need to ensure the viability of the business you plan to invest money in and the value of the assets you put up as collateral. They will also look into your current business and its performance in the market. This is because the probability of them getting their money back is banking on your ticket to success. Another critical factor that determines your fate when getting a business acquisition loan sanctioned is your credit score and your business’ credit rating. If you plan to go down this route, ensure all your bases are covered. Once the value of your assets is assessed, lenders can take up to 3 to 6 weeks to process your loan and finally sanction it.

Some important documents you might need: 

This quick, rough checklist may be helpful when you apply for a loan. Some of the things you could be asked for at the time of your application are listed below –

• Details of your business (this may include name, address, business owners, partners, and financials)

• Credit history (Personal as well as for the business)

• Your business plan for your acquired business

• Details of all assets that will be put up against the loan

What are the benefits of a Business Acquisition Loan?

Some of the benefits of a Business Acquisition Loan are unmatched. 

No Collateral in some situations, WHAT?

Traditional loans often demand collateral like property or inventory, reducing the bank’s risk. Yet, there are options like the SBA 7(a) loan, which doesn’t require the business to own assets to secure financing. For instance, purchasing intellectual property, such as a software license, requires no collateral for up to $25,000, ensuring accessibility for asset-light ventures.

Quick Turnaround Times:

Business acquisition loans often boast swift processing similar to express shipping services—many online lenders, acting as expedited couriers, grant approval within 24 hours, enhancing operational agility. Despite potential delays with certain SBA loans, many lenders operate like efficient logistics providers, ensuring prompt delivery of funds.

What are the benefits of acquiring an existing small business v/s setting up a startup?

Acquisition bypasses the startup phase, leveraging existing infrastructure for swift profitability. Established businesses often offer faster expansion opportunities with proven business models and more accessible financing and cash flow access. This is because established businesses have a pool of customers that aid in loan repayment and immediate salary draw. Mature companies that have been around for a while also contribute to recognizable branding, boosting company value and market presence. Acquiring a business grants access to an in-place team, removing the hassle and effort wasted hiring and training new staff. The business acquisition expands the market reach and helps increase revenue potential instantly. 

Expanding an established revenue stream yields greater returns than a startup’s initial growth. At the same time, efforts to grow any business require similar energy; the documented business benefits from a more extensive customer base, trained personnel, and an existing supply chain, resulting in potentially higher financial rewards for new owners. Whether you go the startup or acquisition route is up to you; however, if there’s one thing we know, it’s that if you’re choosing to buy over another company, procuring a business acquisition loan should be your top priority.

That’s all, folks! 

Want to know more? In addition to HR, benefits, recruiting, and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping, and accounting) and Risk (business insurance). Talk to an expert today.

Authors

Devayani Bapat

With 6 years of experience in copywriting and social media management across genres, Devayani's heart lies with weaving words into stories and visuals into carefully crafted narratives that’ll keep you wanting more. She carries with her, her pocket notebook, a trusted confidante that goes with her wherever she goes, and scribbles down into it anecdotes on the go. Her secret weapon for keeping all things copy interesting! Apart from writing, Devayani is huge on travelling. You'll find her booking her next adventure while she's on her current one. And while on those adventures, you'll find her devouring true crime books one after the other. Whether it's a low down on a recent case or one that occurred 70 years ago, she can cook up a story narration you'll never forget.