Financing a small-business acquisition with loans: 3ways and preparations
Loans for business acquisitions include bank loans, SBA-guaranteed loans, and seller financing. Each type of loan has different underwriting criteria and documentation requirements, with personal credit, business cash flow, and collateral among the key considerations.
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A loan for a business acquisition is a financing tool that allows a financial institution or the seller to share the cost of the acquisition. Loans are primarily assessed based on the business’s cash flow. Loan proceeds are used for the purchase price, legal and tax expenses, working capital, and other costs.
Loan types include traditional bank loans, SBA-guaranteed loans, and seller financing. An SBA-guaranteed loan is a type of loan backed by a guarantee from the U.S. Small Business Administration. Seller financing is a method in which the seller provides part of the amount in the form of a loan.
Loan providers include local banks and credit unions, online lenders, and banks that offer SBA-guaranteed loans. Each provider sets different loan limits and repayment terms. Some online lenders may offer faster underwriting, but their costs may be higher.
Key factors in loan underwriting include the business’s historical and projected cash flows, personal credit history, availability of collateral, and the buyer’s experience. During the loan review process, lenders require proof of revenue and tax filings. Some loans require a personal guarantee.
Documents submitted to obtain a loan include the business’s financial statements, tax returns, a draft acquisition agreement, a business plan, and personal credit documents. Legal and accounting reviews are conducted concurrently. Due diligence and loan underwriting must be completed before the acquisition can be finalized.
Loan costs consist of interest and fees. Some loans charge an upfront fee or a prepayment fee. For seller financing, repayment terms are determined through discussions with the seller.
Sources: CNBC Top News
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