If you’re looking to purchase an existing business, you’re probably looking for a business acquisition loan. But there are several options for you to choose from – from private equity to traditional loans, crowdfunding to angel investors. They all have their relative pros and cons, which we’ll go through below. Buying an existing business can be an incredibly successful investment strategy compared to starting something from scratch.
If you’re looking at a profitable small business, then you’re guaranteed to be getting a tried-and-true product or service. There is no need to develop a product, hire staff, take it to market and hope that the idea is a successful one.
Let’s look at financing options for business acquisition loan.
Traditional financing options
1. Bank Loans
A loan from a traditional lender, like a bank or credit union, is when a borrower receives a lump-sum amount from a financial institution. That loan is paid off in fixed instalments over a set period at set interest rates. Most of these loans are secured with collateral – either personal or business – which means that you’re liable if your business fails to make payments.
You need good credit and provide a variety of financial documents – from tax returns to balance sheets and business plans – during the application process.
Terms can vary but are often in the five-year range.
2. SBA Loans
The Small Business Administration (SBA) doesn’t provide loans itself but rather guarantees most of the loans from traditional lenders. The program is designed, in part, to help finance the purchase of existing businesses at favorable repayment terms and interest rates. It can also be used for several other purposes, from equipment purchases to renovations to startup costs.
SBA loans require you to have good personal and business credit scores as well as providing proof that you can make monthly payments and business plans.
Down payments can be as low as 10%, meaning SBA loans are an incredibly attractive avenue for acquisitions.
3. Equipment Financing
Equipment financing is when a company seeks a loan to purchase specific equipment where the lender uses the equipment itself as collateral. They can also put a lien on other business assets. Once the loan is paid off, you own the equipment outright.
If you default, the lender may repossess the equipment or any other business assets you’ve put up as collateral.
If you’re opening a restaurant, you might need to buy commercial appliances. A bank might give you an equipment loan for 80% of the value, so you would have to put down 20% upfront.
This gives you the flexibility to get the equipment you need while using available cash for more pressing needs.
Alternative Financing Options
1. Private Equity
Private equity companies buy and manage companies with the aim of selling them for a profit in the future, often on a 7- to 10-year term. The firms are funded by institutional and accredited investors.
Private equity firms often become very hands-on in terms of management of the company, looking to make the company more competitive or profitable before selling.
They usually invest in established companies compared to venture capital which focuses on startups.
Private equity companies can buy private or public companies but generally avoid buying companies that remain listed on the stock exchange.
Crowdfunding is a form of fundraising where you ask the public for contributions in exchange for equity in the company. This usually involves asking many people for relatively minor contributions compared to getting the necessary funds from a handful of individuals like private equity or angel investors.
This can come in the form of equity crowdfunding, where investors receive shares in the company, debt crowdfunding, where investors lend you money or donation crowdfunding, where a company offers a special product or token in exchange for a donation.
3. Angel Investors
Angel investors are usually wealthy or retired people who want to invest directly in small companies, hoping to contribute their experience and contacts into a successful operation.
These investors usually get involved early on, usually in fairly small amounts ranging from $25,000 to $100,000. They often supervise their investment with a seat on a board of directors, for example.
4. Mezzanine Financing
Mezzanine financing is a combination of debt and equity financing where lenders have the right to convert debt to an equity interest in the event of a default. This generally occurs after other lenders have been paid, like private equity.
It is often used to finance.
Mezzanine financing is often used as a way for companies to raise money for a specific project.
This can often provide generous returns to investors compared to corporate debt, usually between 12% and 20% per year.
How to Choose the Right Financing Option?
All the above business acquisition financing options have advantages and disadvantages. It’s ultimately up to you to decide which fits best with your business.
Private equity companies are usually looking to make large investments (around $1 million) but will likely want to have a lot of control in exchange.
Angel investors might be less hands on but usually come on board at the earlier stages with smaller amounts of cash.
If you’re looking to simply expand operations with some new equipment, then equipment financing is likely the best for you.
SBA loans are an incredibly attractive avenue if you’re looking to purchase and existing business as they have generous repayment terms and favorable interest rates. On the other hand, you could possibly find better rates but a shorter repayment period with a traditional loan if your finances are good.
Think about what you’re looking for before choosing one of the above business financing options.
Also read: Why Good Financial Health is Crucial for Business Success