Alternative Financing for Business Acquisitions

This blog post is contributed by Boopos. Boopos offers revenue-based financing for funding mid to long-term investments.

I want to buy an online business

Many people think of buying an existing business as a way of starting an entrepreneurial experience. Buying a business can be incredibly rewarding. However, obtaining a business acquisition loan can be a difficult issue to deal with. Are you worried about financing for this type of transaction?

$50 billion worth of small businesses are sold every year in the United States and they rarely qualify for bank financing or government SBA. In fact, according to Biz2Credit, only 19% of SBA acquisition financing requests are approved. Additionally, it may take up to 6 months to obtain financing for your transaction.

According to Connect2capital, big bank loan approval rates might be anywhere between 10 percent and 30 percent of loans, while small bank and credit union approval rates hover between around 20 percent and 40 percent.

Fortunately, there are alternatives to these traditional sources of financing for business acquisitions that can help entrepreneurs take the next step toward business ownership.

How to get business acquisition financing

Buying a business implies in most cases getting a loan from one of the different financial sources available. There are three main points to take into consideration when getting a loan for buying a business.

• Know how to qualify and understand what lenders are looking for

When you are getting a loan to buy a business, it is important to evaluate your qualifications and understand what lenders take into consideration for approving financing. Loan requirements vary depending on the lending solution you choose.

The loan requirements can move from an endless list, including personal and business credit scores, cash flow, collateral and balance sheet, business plan and business valuation, related experience, etc., to the simplest one: providing business monthly P&L for the last 24 months and identifying the Amazon storefront or webpage. That’s enough for qualification in some cases, allowing you to save much more time. So then, take your time choosing the financing source that best fits your needs.

• Choose the best business acquisition loan

After knowing what lenders expect of you for qualification, you have to analyze which kind of small business loan is best for your needs.

According to Fundera’s classification, there are certainly a few financing products that simply fit better for the business acquisitions process than others do.

#Traditional Term Loans

As you can see in the classification below, traditional term loans are mostly chosen for those buyers who are looking for the lowest interest rates and the longest terms. It’s the easiest to understand because it is the one with which we are most familiar.

If you’re looking for business acquisition loans with a fixed interest rate and predictable monthly payments, a traditional business term loan will fit you well. It’s the easiest to understand because it’s probably what you naturally think of when you think of a business loan. However, bank lenders have high standards and requirements for funding your acquisition transaction. It is probable that you will not qualify the first time, and it will require a lot of time and diligence to qualify. It may not be the best option if you have found the business you were looking for as you could end up missing your chance.

#SBA Loans

For those buyers that don’t qualify for a bank term loan, SBA loans could be the next financing option. The SBA offers two loan programs that are suitable for business acquisitions: the 7(a) loan program and the CDC/504 loan program.

However, as we have mentioned in the introduction, it may take up to 6 months to obtain financing for your transaction, and most of the requests are not approved.

#Online Term Loans

If you need funding faster, can’t qualify for a bank or SBA loan, or you’re a new entrepreneur looking to buy an existing business, online term loans might be the best option for you.

Some online lending platforms offer you revenue-based financing for business acquisition. This option will be easier to qualify for than a bank or SBA loan and faster to get funded (qualified in 48 hours and funded in 7 days).

Additionally, this alternative has terms of up to 5 years with loan amounts from 100K. Although the interest rate will likely be higher than with a bank or SBA loan, you can prepay early decreasing interest rates; depending on the business you are acquiring and the time you will spend to pay back, the multiple varies.

#Seller Financing

This means that you’re getting a loan from the seller of the business itself.

The seller takes part of the business’s purchase price in cash and the remainder in the form of a promissory note. The buyer will pay back with interest over a period of time—typically three to five years.

• Complete the application process.

Once you’ve selected the right financing source for your business acquisition and you are ready for the application process, you’ll want to gather all of the required information to do that. As we have said before, depending on your choice, you will have a more or less long list of documentation to be submitted.

If your business qualifies for the acquisition loan, it will be time to get funded. At this point, you will know the financing amount your business qualifies for, the interest rate and the repayment structure. By signing a term sheet, you move into due diligence before closing.

Summary

If you have your next purchase in mind, it is important that you evaluate all the options, analyze the pros and cons and decide on the one that best suits your circumstances. To do this, consider what type of business you are acquiring and how much money you need to close the transaction.

When choosing to finance, order your priorities. You can opt for financing sources with lower interest rates but long qualification and financing processes, running the risk of not qualifying after months of waiting. In addition, the list of requirements can be overwhelming. On some occasions, the seller himself may offer you financing but it is not a guarantee.

If you want to make it easy and fast, there are other options that offer you financing in a matter of days, without giving up the long term and with great flexibility in the repayment.

Analyze all the factors and choose the option that best suits you.