You’ve already thought of the brilliant idea that will solve all of your business problems, and now you just need to take it to the next level. You’re ready to invest in your business and buy some new equipment or even hire some help, but you don’t have enough cash flow to front the money yourself.
Fortunately, there are financing options available for you — here’s how to get a business acquisition loan.
Figure Out Why You Need a Business Acquisition Loan
Why do you need an acquisition loan? If your goal is to buy out another company, there are some major questions you’ll want to be answered before signing on any dotted lines. For example, how much debt does that business carry? What’s its earnings history like? Do I really want to take on that much debt, and if so, what happens if I can’t pay it back?
What Factors Determine if You Can Get a Business Acquisition Loan?
A business acquisition loan is less formal than other types of loans, so lenders are much more interested in your personal credit score. If you have a great credit score, there’s a good chance you’ll even get free grants for small business without too much hassle. However, if your credit score is not so hot, it may take some serious legwork to convince lenders that you are worth taking on as a risk.
According to Lantern by SoFi, most business acquisition loans are unsecured, which means there’s no collateral backing up your loan. But if you have a business, your business credit score can come in handy. Your business credit score depends on several factors, including annual revenue, debt-to-equity ratio, and the number of employees.
In addition to your credit score, lenders will look at your cash flow. They’ll want to make sure you have enough money coming in every month to make a down payment and monthly loan payments.
Do You Have Related Experience?
If you already have a detailed business plan in place, that will go a long way in proving to your lender that you have what it takes to run your own business. However, you should also have at least three years of relevant work experience in your field. For example, if you want to open up a pizza restaurant, you should have at least three years of relevant work experience in either customer service or food service.
If not, the lender will likely reject your application. The more direct experience you can show related to opening and running a small business, the better your chances.
How Do You Apply for a Business Acquisition Loan?
Many organizations offer grants and low-interest loans specifically designed for small businesses with high growth potential. You can apply for a business acquisition loan through one of these organizations or go directly through your bank. Free grants for small businesses are also an incredible way to raise money without resorting to debt or giving up equity.
Many banks require a detailed business plan as part of their application process. In addition, all bank loan applications must include personal information about you, including your income history and tax returns.
It is common for lenders to require at least two years of financial statements, including income statements and balance sheets. For large business loans, they may also want audited financials. That includes a formal business valuation where they will have you undergo a third-party appraisal as part of your application process.
In sum, acquiring a business is much easier when you have a solid business plan in place. From there, it’s simply a matter of applying for loans from various government agencies and lenders. If you find yourself turned down by one source, don’t give up. Keep at it until you’ve found funding for your dream acquisition. Once you do, congratulations—you’re well on your way toward entrepreneurship.