Business Acquisition Loans: All Financing Options (Slowest to Fastest)

7
October 2019

You’ve found the perfect business opportunity, and you need to move fast. But how do you get the money you need to purchase an existing business or opening a new franchise? With a business acquisition loan.

But let’s clarify some terms: the financial industry talks about business acquisition loans but there is no one specific loan product solely intended for purchasing an existing business. What we’ll look at in this article are which of the various funding options fit your needs best.

When evaluating your options for business acquisition funding, you’ll want to consider how much you’ll need to borrow, the credentials required for financing approval, and how quickly you’ll be able to access the funding. Chances are you can’t afford to wait weeks before being able to move ahead with your plans.

Here are your options, listed in order of how fast the approval process is, from the slowest to the fastest.

SBA Loan

These loans are backed by the Small Business Administration (SBA), which promises to pay up to 85% of the loan if you default. That makes banks and credit unions feel less nervous about lending a small business owner money.

 SBA-backed loans often have very favorable rates. But you do need a credit score of at least 640 (700 and up means you are much more likely to be approved), an excellent borrowing history, and a lot of time to devote to gathering the documentation required to qualify for the loan. And you must have a US-based, for-profit business in an eligible industry

For complete details, look at the SBA’s eligibility questionnaire. If you qualify for an SBA loan, you’ll benefit from low interest rates and extended repayment terms. You can also come back to the SBA for loans to build and grow your new business. But you won’t get the loan quickly, the SBA – understandably – wants to reduce its risk as much as possible, and that means a very extensive approval process.

Traditional Loan

Eligibility varies depending on the bank, your location, and available loan programs, but in general you may be able to get a short-term loan (repayable in 3-12 months - sometimes up to 18 months) if you’ve been in business for about a year, have a personal credit score of at least 550+ and have $50,000 or more in annual revenues.

For a medium-term loan (2 to 5 years repayment), you need at least a year in business, a 600+ credit score and about $100,000+ in annual revenue. Requirements for a long-term loan – repayable over five years – are similar but you’ll need at least a 700 credit score.

Long and medium-term loans will often require collateral up to or over the amount of the funds borrowed. The value of your collateral – which is called the loan-to-value ratio – will be calculated by your lender. There are different ways to do this, but in general you would expect about 70 percent of the actual value of appraised real estate or 60-80 percent of inventory, cash, or equipment.

The benefits of a traditional loan include a predictable repayment amount and lower costs/rates than “bad credit” loan products. But qualification requirements are strict, it typically takes at least a month before approval is processed, and potentially a week or so longer until funds are available.

Lines of Credit

A line of credit gives your business a cash cushion, since you have pre-approved access to a specific amount of money that you can draw from as needed.

There are two types of credit lines: fixed and revolving. If you get a fixed loan, you have one-time access to the funds. With a revolving line of credit, you pay your balance and the amount resets.

If you have an excellent credit history you may qualify for an unsecured line of credit. Secured lines of credit are also available, but you will likely need to put down collateral that’s worth at least as much as the loan you hope to secure. The catch: you want to apply for a line of credit before you actually need it.

Personal loans

If you’re a small business owner with a great credit history, you may want to apply for a personal loan to fund the purchase of your new business. Since banks rarely approve loans for startups and small businesses, a personal loan may be your only option if you want to work only with traditional lenders. You will need at least a 720-credit score, a flawless credit history, and collateral that covers the loan by at least 100%. Since personal loans typically are for lower amounts than business loans, you may need to acquire supplemental funding as well. Unlike business loans, personal loans can be approved within one-to-three weeks.

Alternative funding

Also known as “alternative lenders,” these funding sources provide working capital and other forms of financing for small and medium-sized businesses whose owners need to access funds quickly and/or don’t qualify for more traditional loans from banks or credit unions.

Many alternative funders conduct their businesses primarily online. Rather than requiring massive amounts of paperwork, in-person meetings and detailed business plans, alternative funders rely on targeted algorithms and the current financial status of a business to determine whether to offer funding.

The easiest way to find an alternative funding source is to get pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.

One Park Financial acts as an advocate to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.