Securing funding for business growth — perhaps to fuel a pending merger or acquisition, or maybe to spur some other type of corporate growth strategy — is never a simple task. Why? Because the layers of bureaucracy, the rules that the pencil pushes demand, and the legal issues regarding financial transactions make it a time-consuming task, not something that could be worked out during a lunch hour. If you’re looking into financing to deal with the impending expenses of your company’s growth plans, a business acquisition loan might be the tool that is required.
What Is a Business Acquisition Loan?
In simple terms, a business acquisition loan is money lent to a company to purchase assets or to acquire another business, or for a number of other business-related purposes. The terms of the loan almost always dictate that the funds can only be used for the purposes agreed upon by the lender and the borrower.
A business acquisition loan is used when a company doesn’t have enough liquid capital to grow or acquire an asset. In most instances, the company that seeks the loan has assets with tangible value, which is typically used as collateral for the loan. In some cases, the asset that is purchased is used for collateral. The loan must be approved, and the proceeds must be used for the intended purpose and within the allotted time agreed upon in the terms of the loan.
Types of Business Acquisition Loans
As with every other type of financial instrument, there are various types of business acquisition loans. These include the following:
The Small Business Administration (SBA) is a government agency that pairs lenders with businesses to secure loans. Again, there is a wide range of various types of SBA loans available, but a 7(a) loan is best suited for companies looking for a business acquisition. Currently, up to $5 million is available per loan, and flexible terms allow up to 25 years for repayment. As is the case with virtually every other type of loan, a history of strong revenues and excellent credit is required.
A term loan is more of a “standard” type of loan — a lump sum, with fixed installments required for the life of the loan. Similar to other loans, it may be at a fixed rate (the same interest rate throughout the course of the loan) or at a variable rate (the rate can fluctuate and is usually based on the Federal Reserve’s prime interest rate). Most banks, credit unions and online lenders offer term loans; however, they must be secured, meaning you will have to sign a personal guarantee, holding you liable for the balance in the event the business defaults on payments or goes bankrupt.
There are other types of loans available, including startup loans, which are geared to new businesses starting up. These loans are similar to term loans; however, concessions are often made, as they’re for the purpose of starting a business. In addition, there are rollover loans for business startups (ROBS), which allow for using funds from a retirement account to secure the loan. However, both these options are used strictly for new business startups and not necessarily for business acquisition or M&A purposes.
The Pros and Cons of Business Acquisition Loans
As is the case with every financial transaction, there are pros and cons for embarking on the path toward a business acquisition loan. These include the following:
- A chance to grow the business faster
- Longer repayment terms can mean more flexibility
- Collateral isn’t necessarily required
- Borrowers with excellent credit may qualify for lower interest rates
- These types of loans can be hard to qualify for
- A down payment on the loan is required in many instances
- Depending on some factors, you may not qualify for the full amount you requested
- A personal guarantee might be a condition for approval
How to Apply for a Business Acquisition Loan
Obviously, you will need to have your ducks in a row when it comes to applying for a loan. Whether you’re working with the SBA or directly with a lender, there are many things that you’ll need. These include the following:
- Business valuation: The company that’s borrowing the money obviously needs to be worth something, so an impartial third party must produce documentation stating the valuation of the business. These financial statements will include items like bank statements, balance sheets, profit and loss statements and tax returns.
- Letter of intent: This is a letter that is written by the buyer and presented to the seller in the instance of an M&A. It outlines the proposed terms of the deal, and usually includes a clause that gives the buyer an exit in the event that the financing falls through.
- Credit reports and scores: Though the lender will procure those reports on its own, the borrower should take time to make sure that these are in order, and that there are no dings or other issues that will damage the credit report.
One More Important Tool
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Caplinked offers VDRs with all the tools that save both time and money and will allow you to go through the entire M&A and business acquisition loan process with the peace of mind that your transaction is guarded by multiple layers or security and advanced version control that assigns different levels of access to certain documents. Start your two-week free trial today!
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.