If you're looking to buy a small business, here's the good news: You don't need to be a massive corporation to do it. The catch? You may still need access to a significant amount of capital.
While some business purchases can be made without paying entirely out of pocket (think seller financing or crowdfunding), those deals can take a ton of time and negotiation. If you want a more straightforward path to funding, a business acquisition loan is worth considering.
Business acquisition loans
What's a business acquisition loan?
A business acquisition loan is simply a loan that's used to purchase a company, including owning a franchise or buying out a business partner. Similar to a personal loan, business acquisition loans get repaid in fixed, equal monthly increments over an agreed upon period of time (plus interest).
The advantage here is that you don't need to risk your own cash to purchase a business. You will, however, need to budget for repayments, while also supporting the cost of operations for your newly acquired business.
You can use the loan to acquire a business whether you're an investor, a small or large business yourself or just an individual who wants to buy a company that's already up and running instead of starting your own from scratch.
Where to find a business acquisition loan
You can get a business acquisition loan through programs backed by the Small Business Administration (SBA), as well as through banks, credit unions and online lenders.
Generally, repayment terms can be as short as three years or as long as 10 years, with SBA-backed business acquisition loans carrying terms as long as 25 years. You'll also typically be expected to make a down payment of at least 10% of the purchase price, sometimes even upwards of 30%.
Aside from that, you'll want to apply with a good credit score (the exact credit score requirement can depend on the lender), and some lenders may require personal collateral to secure the loan.
You can actually use an SBA 7(a) loan to acquire a business. It's backed by the government so lenders are usually able to offer more favorable terms on the loan. However, requirements for an SBA 7(a) loan can be pretty strict: You'll need a credit score of 680 or higher, no bankruptcies in the last three years, a down payment of at least 10%, no current federal debt, plus managerial experience (or experience in the industry in which you're acquiring the business). You may also be required to put up some collateral to secure the loan.
Small Business Administration (SBA) Loan
Types of loans
SBA loan
Better Business Bureau (BBB) rating
Not Rated
Loan amounts
$500 to $5.5 million ; microloan limit is $50,000
Terms
Varies depending on the lender; up to 6 years for microloans
Minimum credit score needed
Not disclosed
Minimum requirements
Be a for-profit business in the U.S. and meet SBA size standards
Terms apply.
Pros
- Lender options available to those with lower credit scores
- Can choose between microloans, 7(a) loans and 504 loans
- Eligible borrowers could receive up to $5.5 million in funding
Cons
- Some lenders may require collateral
Fora Financial is another small business lender offering term loans for a wide variety of needs, including business expansion, equipment purchases and more. The maximum loan amount offered by Fora is quite high at $1.5 million, but loan terms only go up to 18 months.
Offers many types of loans including small business loans and revenue advance
- Higher loan limits than competitors
- Accepts lower credit scores
- Approval and funding in 24 to 48 hours
- Can increase loan amount after paying back at least 60%
- Prepayment discount
- Short loan term of just 15 months
FAQs
How fast can you get a small business loan?
Many small business lenders can disburse funds within 48 hours. However, if you're applying for an SBA 7(a) loan, it can actually take up to 90 days to receive funds.
How long do you have to be in business in order to get a loan?
Many online lenders typically require borrowers to be in business for at least six months, though sometimes the requirement is at least one year in business. It varies depending on the lender you work with.
Can I get a business loan with a bad credit score?
While some lenders do work with small biz borrowers with poor credit, it's usually recommended that you improve your credit score before applying so you can get more favorable rates.
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