Business Acquisition Loans: How to Qualify and Use This Loan

A business acquisition loan is a loan that entrepreneurs use to purchase a business or an asset. Individuals can seek acquisition loans when they do not have enough liquid capital. According to Lantern by SoFi, this is how you can qualify and use this loan.

Benefits of the loan

It makes it possible for entrepreneurs to get favorable terms of a loan when they purchase a business. It applies to cases where there is no tangible value for collateral for the loan. If the borrower defaults, the lender can reclaim the asset purchased with the loan. They can liquidate it to cover the unpaid amount.

Therefore, this kind of loan is different from a credit line because the consumers use it at an allocated time as specified when applying for it. Consequently, it ceases to be available if the applicant does not use it as recommended.

An organization can use it to purchase another company. However, an establishment or individual needs to evaluate whether they have adequate collateral to cover such a large loan. They also need to determine whether the new company can generate enough cash to pay the principal and the interest.

How to qualify for the loan

A specific criterion gauges whether entrepreneurs and organizations qualify for a business acquisition loan.

a) Relevant Documents

They will be required to present various documents including;

• The company’s business plan

• Financial projections

• Financial performance records

• Proof of experience in the business

b) Credit score

Business owners and companies must also showcase that they have a good credit score. As proof, they must present the following financial documents:

• Business and personal tax returns

• Previous cash flow statements

• Future cash flow projections

• Any other financial reports

c) Selecting a Financial Institution

Businesses and individuals should select a financial institution that they can use to apply for a loan. Therefore, if they want an SBA loan, it is imperative to note that it only covers a portion of the amount.

d) Letter of Intent

All entities that desire this loan must obtain a letter of intent. The letter should come from the establishment that intends to sell part of their company. Moreover, it kickstarts the process of a loan application.

Types of Business Loans

There are diverse types of acquisitions loans. Their diversity depends on the needs of the company and the individuals who are applying. The following are some of them.

1. Startup Loan

When individuals and establishments want to purchase a business, they should apply for a startup loan. They can get this from lenders, regular banks, and Small Business Administration (SBA). Additionally, they will have to demonstrate that they have the abilities and skills to operate a business.

2. SBA Loan

The organizations involved offer these loans and are considered less risky in instances when the borrower defaults. Therefore, most people prefer this kind of loan as it provides better interest rates and payment periods.

3. Business Expansion Loan

Individuals and companies that currently own a business and want to expand should consider getting a business expansion loan. The lender can gauge whether the borrower will be able to pay the loan. It also requires the borrowers to have been in operation for some time.

4. Equipment Financing

If companies or individuals desire to purchase equipment, they can go for this type of loan. It is less complicated when evaluating collateral as the equipment you buy often serves this purpose.

Getting a business acquisition loan is quite advantageous as it provides the working capital which would otherwise be hard to obtain.