Business Acquisition Loans: Overview and Top Options

A business acquisition loan is designed specifically to finance the purchase of an existing business or franchise. These small-business loans are available from banks, credit unions and online lenders.

The best business acquisition loan is the most affordable option you can qualify for that meets your needs.

What is a business acquisition loan?

A business acquisition loan is used to purchase a business, which may include buying an existing business, becoming a franchise owner, buying out a business partner or purchasing the business assets of another company. Your lender determines how the funds from a business acquisition loan can be used.

Banks, credit unions, online lenders and community lenders may offer business acquisition loans, including Small Business Administration loans. For example, you can use an SBA 7(a) loan to buy a business or increase ownership share in your existing business.

How do business acquisition loans work?

Business acquisition loans are typically structured as term loans, in which you repay the borrowed funds, with interest, over a set period of time. You may, however, be able to use a business line of credit during a business acquisition as well.

Loan amounts, interest rates and repayment terms vary by lender.

Where to get a business acquisition loan

You can get a business acquisition loan from several different sources, including:

Banks and credit unions

Banks and credit unions can offer business acquisition loans with low interest rates and long terms. These loans are a good option for borrowers with strong qualifications who don’t need cash fast.

To qualify for a business bank loan, you’ll typically need good personal credit, multiple years in business and excellent finances. Not all banks or credit unions require physical collateral, but offering this type of security may help you access larger loan amounts and lower interest rates.

Bank and credit union business acquisition loans, however, can be slow to fund and often require lengthy application processes.

SBA lenders

SBA loans are issued by participating lenders, usually banks and credit unions, and are partially guaranteed by the Small Business Administration. These loans have flexible terms and low interest rates and can be used for various types of business acquisitions. Like traditional bank loans, however, SBA loans have strict requirements and can be slow to fund.

To qualify for an SBA loan, you’ll typically need strong annual revenue, at least two years in business and a personal credit score of 650 or higher — although some SBA lenders may have lower credit score requirements.

You’ll also likely need to provide a down payment of at least 10% of the total loan amount when using an SBA loan for a business acquisition. In some cases, you may need to provide additional collateral.

Standard SBA 7(a) loans can take 30 days to a few months to fund. As an alternative, SBA Express loans offer a faster funding time, but they also have smaller loan amounts and slightly higher interest rates.

» MORE: Can you transfer your SBA loan to another person?

Online lenders

If you need funding faster — or don’t qualify for an SBA or bank loan — you might consider a business acquisition loan from an online lender. Online lenders such as iBusiness Funding (formerly Funding Circle) offer acquisition loans in amounts up to $500000 and terms up to 84 months.

Online lenders generally have less strict requirements compared with banks and credit unions. You may be able to qualify for a business loan with fair credit (a FICO score of 630 to 689), and you may not be required to provide physical collateral. Online lenders may also be more likely to work with startups, especially if they have strong finances.

Plus, while bank and SBA loans may take weeks to fund, online business loans can often be funded in a few days. As a trade-off for easier approvals and speed, online lenders often charge higher annual percentage rates (APRs) than traditional lenders.

» MORE: How to finance a business purchase

Best business acquisition loan options

Pros and cons of business acquisition loans

How to get a business acquisition loan

Follow these steps to get a business acquisition loan:

1. Determine the value of the business you want to buy

Lenders typically rely on a business valuation — an evaluation of the economic value of the company you’re looking to buy — among other factors, when determining the loan amount to offer. As a result, you’ll want to get an official valuation before you start the application process.

These valuations are often done by independent third parties who use business assets, future earnings and current market value among other factors to get a fair assessment of what the business is worth.

2. Get a letter of intent

A signed letter of intent spells out the terms of the sale of the business, such as the purchase price, what assets are included in the sale and any liabilities the new owner will take on. Like a business valuation, lenders will often ask you to provide a letter of intent as part of your loan application.

If you’re concerned about making an offer before you have a loan, a clause can be included in the letter that states your offer is contingent on you getting financing.

3. Evaluate your qualifications

In addition to the financials of the business you’re purchasing, lenders will underwrite your application based on factors such as:

• Personal credit score. The higher your credit score, the more likely you are to qualify for a loan — and one with the most competitive rates and terms.

• Annual revenue. Strong existing finances help show lenders that you have the ability to repay your loan.

• Time in business. Your time in business is a measure of success and security for lenders. If you have multiple years in business, lenders are more likely to believe that you have the experience to manage the company you’re purchasing — and therefore, will be able to repay the funds you borrow.

• Down payment. Although not all lenders require a down payment, providing one can help you access better rates and terms. 

• Collateral. You may be able to use your existing business assets — or assets from the company you’re buying — to secure your financing. Physical collateral helps mitigate a lender’s risk, as they can seize the assets if you can’t repay.

4. Compare lenders

Research and compare several lenders to find the best option for your needs. You should compare factors such as business loan rates, fees, repayment terms, application process and customer support. Use NerdWallet’s business loan calculator to compare overall loan costs between lenders.

It may be helpful to read lender reviews to get a better sense of their reputation. Look for lenders with good reviews who are fairly transparent about their rates, fees and terms.

5. Gather your application documents

Once you have decided on a lender, you’ll need to provide specific documentation based on their requirements. The speed with which you can gather this information can affect the overall timing of the application process.

You may need to provide:

• Business valuation.

• Signed letter of intent.

• Sales agreement.

• Franchise agreement, if applicable.

• Business financial statements.

• Business tax returns.

• Contracts and leases.

Keep in mind that the lender will likely ask for your financial documentation (bank statements, tax returns, financial statements) in addition to those from the business you’re purchasing.

6. Apply and review loan agreement

Depending on the type of lender, you will submit your application online, over the phone or in person. Once you’ve been approved, you’ll receive a business loan agreement. You should review this agreement carefully and make sure you understand the repayment terms, rates and fees.

After signing the agreement, the lender will disburse your funds. The lender may send funds directly to the seller, or in a lump sum to you, depending on its specific process.

» MORE: How to get a loan to buy a business

Alternative business acquisition financing options

If you’re looking to buy a business, you may have funding options outside of traditional term loans. Here are a few to consider.

Seller financing

With seller financing, you’re borrowing the capital you need to purchase the business directly from the current owner. You work with the owner to create an agreement regarding terms and interest, then repay the owner directly.

Equipment financing

If your business acquisition includes equipment, you might use an equipment loan to finance part of your purchase. Or if you’re buying a business that relies heavily on equipment, such as a construction business, you may be able to find an equipment loan to cover a majority of the costs. With equipment financing, the equipment typically serves as collateral on the loan.

Franchise financing

If you’re buying into a franchise, you may be able to secure a loan directly through your franchisor or with a lender it has partnered with. Your franchisor may be able to work with you to provide better terms or discounted fees than other franchise loan options.

Self-funding

Though it can be risky, self-funding a business purchase by using personal savings or using your retirement fund can pay off if the business is a success. This option may be less risky when buying a business as opposed to starting one from scratch since you are likely purchasing assets, a customer base and more, and the numbers are already there to demonstrate the business’s potential. The risk, however, is that you may lose your retirement or personal savings if the business fails.

Friends and family loans

Turning to your friends and family for money may be easier when you’re purchasing an existing business with a track record of success. Borrowing from friends and family can save you money on interest and fees, and can potentially mean accessing capital fast by avoiding an application process; however, it’s still prudent to get an agreement in writing to avoid personal disputes.

Frequently asked questions