How Acquisition Loans Work –

How Acquisition Loans Work -
Written by Publishing Team

  • Takeover loans are used to help business owners acquire other business assets or even entire businesses.
  • Buyout loans come in several types, from traditional long-term loans to revenue-based loans and lines of credit.
  • Generally, acquisition loans use the assets acquired as collateral to secure the loan.
  • This article is for business owners who are interested in using a buyout loan to expand their business and acquire new assets.

Acquisition loans are loans that companies use to acquire business or other strategic assets, such as equipment. These are purchases that typically cannot be made using the company’s normal cash flow, so businesses use loans to make the purchase without raising capital. With an acquisition loan, your company can make large strategic purchases for as little as 15%, then pay off the balance over time.

Takeover loans are very common for rapidly growing companies as well as those actively engaged in mergers and acquisitions. They are also sometimes used by companies that use large or expensive equipment, such as construction companies, data storage providers, or large contractors. These buyout loans help companies acquire vital assets (including other businesses) that can help them grow their bottom line.

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What is an acquisition loan?

An acquisition loan is a loan that companies use to acquire an asset or even another business. Some (but not all) buyout loans are used when the asset being acquired is the security of the loan – this is especially useful when your business does not have enough value to secure a loan with separate assets.

Most buyout loans require you to make a down payment to finance part of the acquisition. SBA loans, for example, require at least 15% of the total transaction value as a down payment (also known as a “capital injection”). Depending on your business, the type of loan and the asset you are purchasing, the lender may require a down payment of 20% to 30% of the total transaction.

In some cases, lenders may require less than a 15% reduction, but they may also charge higher interest rates or offer less favorable terms. [Need Advice?: Tips for Negotiating a Business Loan]

Takeaway keyMain takeaway: An acquisition loan is specifically designed for the purpose of acquiring the assets of another company or the same company.

Types of Business Acquisition Loans

There is no specific type of buyout loan for companies. Alternatively, there are several types of business loans that can be used to obtain other businesses, including term loans, lines of credit, government-guaranteed loans, and startup financing. Each type of loan has different advantages in different circumstances, although not all of them are suitable for every organization.

5 Types of Business Acquisition Loans

loan type Feature
SBA Loans Great terms for borrowers with good or fair credit
Conventional Term Loans Best terms for borrowers with excellent credit
startup loans Small loans are easy for new companies to obtain
business credit limit Revolving credit that can be borrowed frequently, in which companies only pay interest on the money they borrow
Revenue based loans Payment based on fluctuating revenue, rather than fixed payments

The terms and qualifications of each of these small business loan types vary widely, and each has distinct advantages in certain situations. Some offer lower interest rates or lower fees, while others offer interest-only payments, longer repayment periods, or increased flexibility.

Small Business Administration (SBA) loans

SBA loans are business loans that are partially guaranteed by the federal government. The SBA offers multiple loan programs, but most SBA loans are term loans. These loans often offer the best interest rates available to business owners who do not have perfect credit and allow them to finance transactions with less than 10%.

Plus, with SBA loans, a portion of the loan is guaranteed by the federal government, and this limits your liability if you default later — although it also includes an additional fee of several percentage points of the guaranteed amount.

SBA loans are generally flexible and can be used for different types of acquisitions. For some types of purchases, the term of the loan can last up to 25 years.

Conventional Term Loans

Traditional long-term business loans are those that a company can obtain through a bank or other traditional lender. These loans usually offer the best terms available – including the lowest interest rates – to eligible borrowers.

However, these loans are perhaps the most difficult to qualify for. This makes it ideal if you have excellent credit and an abundance of free cash flow to service your business loan – and even more so if you have established banking relationships with lenders who offer this type of financing.

In addition to the lowest interest rates, long-term business loans typically offer some of the lowest fees available, since they do not charge the guarantee fees that SBA loans do.

Did you know?Did you know? Long-term loans usually have the best terms. However, they are difficult to qualify and often take longer to provide funding.

startup loans

Where most business loans require businesses to operate for at least a year or two, startup loans are best for businesses that are still taking off. These loans usually have a standard application process—even through the SBA—because there isn’t a lot of information to review about the company’s finances. The fees may also be lower, since most startups do not have the funding to pay a large fee.

Startup loans are riskier for lenders than many other types of business loans, so interest rates may be higher than those for traditional term loans or business lines of credit, but the rates are still lower than those charged by business credit cards.

Another thing to note about startup loans is that some programs limit borrowers to smaller loan amounts than those available through some other loan programs, even though the SBA’s maximum startup loan limit is $5 million through the agency program(7) a). Depending on the software you’re using, this may limit the amount of provisioning you can complete. But this may make sense, given that many businesses just starting out haven’t yet created the cash flow needed to support large loan balances.

business lines of credit

Business lines of credit (BLOCs) are not often used as acquisition loans, but in certain circumstances they can be ideal for this purpose. These loans are revolving, which means that once a certain amount is approved (your credit limit), you can borrow that money any time you need to during the withdrawal period.

Once you withdraw against your line, you only pay interest on the money you actually borrow (monthly interest payments only), and you can pay off your balance as you choose. If you pay off your line during the withdrawal period, you can borrow that money again without going through another application process.

The interest rates for commercial lines of credit are usually slightly higher than those for fixed term loans, but you get more flexibility with Block than you get with term loans.

Once the withdrawal period is over, your credit line can usually be converted into a structured loan with fixed monthly instalments, so that you can pay off the balance over several years.

Revenue based loans

Revenue-based loans are structured using flexible payments, which are calculated as a percentage of monthly revenue rather than as a fixed one. With a revenue-based loan, you get a lump sum up front, and then the lender takes a percentage of your business revenue until the loan is paid off with interest — similar to a merchant cash advance.

Since revenue-based loans have a variable repayment structure that represents more liability to lenders, they often charge higher interest rates than other types of loans. But these loans also reduce your hurdles as a borrower, because if your work month is slow, your payments are lower – rather than risking a default.

How do you qualify for a takeover loan?

Qualifying for a buyout loan is often the same as any small business loan. You need to determine the need for financing (or potential financing need, if you are only trying to arrange financing before defining the target asset for it).

Once you know the reason for borrowing, you need to choose the type of financing that is appropriate for your business conditions, and then choose a lender that specializes in this type of financing. For example, if you want to get an SBA loan to purchase a new facility, you should choose a bank or loan broker that has secured a lot of SBA loans and has been approved successfully.

Next, you need to go through the application process. This requires completing several forms, as well as providing supporting documentation and answering any questions the loan officer may have about your business or the purpose of the loan.

Here are some of the key criteria lenders use to decide whether to approve a takeover loan:

  • credit: The lender will look at your business credit report (if your business has established credit) and perform credit checks for you and any partners who own 20% or more of your company. Minimum credit scores vary by loan type (640 is the minimum for SBA loans).
  • he won: The lender will examine your company’s finances to ensure that your current or projected revenue will support the payments required to service the loan. Most lenders look for a debt service coverage ratio of 1.25 times or more (your earnings divided by debt service must be greater than or equal to 1.25).
  • down payment: The minimum down payment varies depending on the type of loan. Most loans start from 10% to 15% of the total transaction, but the repayment can be higher depending on your credit profile, business cash flow, etc. Some loans, including lines of credit, do not require a down payment.
  • Use of funds: Lenders will need to know why you’re asking for financing (whether you’re buying a facility, a business, or a piece of equipment), the value of the asset you want to buy, how it will affect your business’ profitability, and whether it’s a good business decision.

Not every small business will qualify for a loan for a large asset or other business. Some businesses do not have enough revenue to service loan payments. In other cases, sole proprietorships may have prior credit problems that need to be settled before they can get a loan. If your loan application is denied, you may still be able to fund the acquisitions, but you may need to get a co-signer or share capital increase instead.

What are the advantages of business acquisition loans?

Using a buyout loan to make large purchases can have a lot of advantages. These can vary based on your business circumstances, as well as the type of loan and terms the lender offers.

These are some of the general advantages of purchase loans:

  • They reduce the amount of capital your business must use to complete the acquisition.
  • It allows you to make your own acquisition and pay it off over time.
  • They help you build business credit.
  • If used appropriately, they help your business grow its bottom line.
  • Loans may be based on your projected revenue (post-acquisition) rather than current sales.

Acquisition loans are not always ideal. In many cases, companies may not be eligible to use it. But for those who qualify and when used properly, business buyout loans can be very beneficial in many circumstances.

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