When Do You Need an Acquisition Loan?
Acquisition loans are a type of financing that allows one business to acquire another business’s assets or complete a merger. Acquisition loans come in various types, each with its own terms and conditions for qualifying. If you are a business or entrepreneur looking to expand by obtaining new assets or merging with another company, an acquisition loan may be right for you.
Who Uses Acquisition Loans?
Acquisition loans are most often used by business owners that need to acquire a certain amount of potentially revenue-generating assets, but who do not have the liquid cash flow in order to make the acquisition outright. A loan can help finance the purchase so the business owner does not miss out on a sound business investment.
Companies that are expanding rapidly, require specialized equipment, or who are actively merging with another business are the most likely to benefit from an acquisition loan.
How Do Acquisition Loans Work?
Lending money carries a certain amount of risk, and acquisition loans are no different. In order to mitigate the risk of loaning money for an unproven business investment, acquisition lenders require collateral. This is usually in the form of the physical asset the business owner is looking to acquire.
Borrowers will also, typically, be required to provide a certain percentage of the loan in down payment. Once approved for the loan, you will pay the loan back over time with interest, or according to the terms set forth in your agreement (see below).
Types of Acquisition Loans
SBA Loans
Small Business Administration (SBA) loans are backed, in part, by the federal government. They share certain characteristics with FHA loans used to secure a mortgage. They are typically term loans that have lower down payment requirements and may accept lower credit scores. The terms can be lengthy-up to 25 years, in some cases. This makes them ideal for business owners who may not have great credit, who do not have a large down payment, or who will need a longer amount of time to pay off the loan.
Like FHA loans, SBA loans carry an additional fee. This helps mitigate the risk of approving borrowers who are inherently riskier.
Conventional Loans
These loans may be obtained through the traditional routes of a bank or other lender. They often have some of the lowest fees and interest rates, which makes them very appealing to potential borrowers. They are, however, more difficult to qualify for. You will need an excellent credit score and a sizable down payment, among other things. Conventional loans can also take longer to process, so they are not the best choice for borrowers with a deadline.
Startup Loans
Startup loans are ideal for smaller businesses owners looking to expand on a moderate scale, perhaps acquire some property. They are usually just beginning their business venture (in operation less than two years), which makes it more difficult for them to qualify for a commercial loan.
Startup loans are riskier, since the business is usually new and financial information is limited. This means that these types of loans generally carry higher interest rates and may be capped at a certain amount. This protects both borrower and lender, since many new business owners will not have the means to support a larger repayment program.
Revenue-Based Loans
Unlike conventional loans, which are fixed, revenue based loans are flexible. With a RBL, you will be awarded a certain amount up front, which you will then pay back each month as a percentage of that month’s gross revenue. This can be a good option for businesses with a fluctuating revenue stream, such as seasonal businesses.
RBL’s can have higher interest rates, since they are riskier than fixed loans. However, knowing that your payment will be lower if you have an off-month can be worth the higher interest rate for many borrowers.
How To Qualify for An Acquisition Loan
Your ability to qualify for an acquisition loan will depend on several factors, including your credit score, business finances, revenue, down payment, and the type of asset you are looking to acquire.
If you are looking for an acquisition loan provider in Colorado, contact our experts at Pine Tree Financial Partners. We finance all sorts of projects all over the sunshine state, and we pride ourselves on finding ways to make your vision come true. Contact our office or go online to schedule a consultation to see how we can help.