Obtaining a Small Business Acquisition Loan

Obtaining financing for a small business acquisition can be easier than obtaining financing to start your own business. The lender can extend you a loan based on a tangible asset, the business you are purchasing, instead of a theoretical future profit you may earn from your new business. This makes the loan less risky for the borrower, but all business loans are high risk. Therefore, you will need to provide your lender with reason to believe you will repay the debt on schedule. The process to obtaining the loan is essentially an argument you pose to the lender proving you will repay the debt.

Step #1: Determine the Value of the Asset

The first step to acquiring a business is not getting financing but understanding what exactly you are acquiring. If you have been approached by the current owner, you will likely find that owner cooperative. Ask for financial reports and a prospectus on the company's value. If you are considering making an acquisition offer without the current owner's solicitation, carry out your own valuation of the business based on any public information you can obtain.

Step #2: Provide Personal Financing

Determine how much you can personally afford to pay for the acquisition. This sum should amount to at least 10 percent of the cost, but it is better to have 20 percent or more to put down on your purchase. If you do not have the cash, consider seeking investors to supply you with initial capital. Lenders will require you place personal capital into the investment in addition to the business loan funds. 

Step #3: Refine a Business Plan

The company you are seeking to acquire already has an operating business model. If you pay the acquisition price today and make no changes, you will inherit this model and current cash inflows, but you will not likely make a large profit on the investment. A lender wants to see you can actually raise the value of the asset through your acquisition. Show a lender your plans for expanding and improving the business model to raise the value of the underlying asset you are acquiring.

Step #4: Apply

Start applying with business loan lenders. Supply information on your asset base for the acquisition, the valuation of the company, the current business plan and your plans for improvement. Fill out an application from the lender with your personal and business credit information. You may also need to supply records of your experience in the business, which is best added as an addendum to your business plan. Your application should demonstrate the reasons you will earn money on this investment and repay the lender. 

Step #5: Await Underwriting

The lender will take time to verify the facts you have presented. They may complete an independent valuation of the asset, and they will certainly review your financial history and business plan. Only if the lender determines the information you have provided is accurate and sufficient to mitigate the risk of the loan will you receive funding. During the underwriting process, be sure to answer any questions fully and thoughtfully and supply supplemental information as needed.