The Pros & Cons of Business Acquisition Loans
Business Acquisition Loans, like all financial products, should be selected to meet the very specific need the product has been created to solve. First and foremost, the buyer/borrower must properly evidence that the target business is, and will remain, viable.
Some benefits for this type of loan include:
- A relatively reasonable APR.
- An easier application process than for startup companies.
- Many loan types to choose from.
- Collateral may be required, but not in every case.
Remain aware, though that–
- The application process is considered a long and winding road.
- Personal guarantees may be required.
- Down payments may be a requirement if the situation warrants it.
Qualifying for a Business Acquisition Loan
Credit decisions in this area of finance do not follow the rigid lending guidelines that are found when underwriting government-backed mortgages, for instance. Underwriters evaluating credit profiles for approval would clearly prefer to see a strong consistent comprehensive credit profile, than just one stellar factor. The underwriters seek out compensating factors and to determine the answers to these questions:
- Can the borrowers pay this loan back? In other words, are they a consistent earner, do they have a steady job?
- Will the borrowers pay this loan back? This revolves around your credit score and overall creditworthiness profile.
- If they don’t or won’t pay this loan back, what will be the value of the collateral be?
It is important to note that both the personal and business credit profiles are evaluated based upon a combination of both their merits. If the business is failing, even great credit risks might find it hard to find financing.
How is a Business Acquisition Loan Underwritten?
Each lender sets forth their own underwriting guides that applicants must meet to be approved for financing. As such, requirements vary by lender as well as the type of business acquisition loan chosen. However, every lender will require an applicant to have a solid business and personal financial history.
Underwriting Standards for Business Purchases:
The applicant must show 2-5 years of revenues that are either stable or in the process of increasing. The paperwork must document a consistent overall profitability picture. There is some wiggle room in this area as the applicant can sometimes pledge additional collateral to compensate for perceived business weaknesses.
Although they have a very real inherent value, underwriters strive to avoid the difficult assessment regarding the true value of the concepts of ‘goodwill’ or ‘name recognition’ because its value often depends on the person who owns/runs the business. The nature of the business’ industry is an important to an underwriter evaluating the entire application’s overall creditworthiness. They tend to prefer:
- -Businesses with fixed income streams
- -Veterinarians, Dentists & Doctors
- -Professional services
- -CPAs and,
Underwriting Standards for the less risky Buy-out Transaction:
A buy-out transaction infers that there is an existing business operating profitably. The borrower, as a result, will have already semi-proven their ability to run the business successfully. As a result, the perceived risk of instability is lower.
The Personal Financial Requirements When Applying for a Business Acquisition Loan
- -Underwriters and lenders will need at least 2-3 years of your complete 1040’s (Yes, every page!).
- -If an applicant’s credit score exceeds 680, they have the best chance for a loan approval. As a general rule, higher credit scores generate lower interest rates.
- -A personal financial statement.
- -The down payment’s verification.
- -Additional information regarding a previous foreclosure or bankruptcy proceeding.
How is the Business Assessed?
The business seller will be required to submit the business financials. These include:
- -2-3 years of the business’s tax returns (i.e. 1120s, etc.).
- -An income statement.
- -A balance sheet that reveals the value of the business’ fixed assets and tangible assets – because some of these high-ticket items may be pledged as collateral for another undisclosed loan.
- -Lenders prefer businesses that exhibit profitability, minimal debt and a solid cash flow.
- -The business entity should prove to have an acceptable credit history including no current delinquencies for payments due to suppliers or employees.
Business acquisition loans vary significantly. It is, therefore, helpful to reach out for some assistance. The team of LenCred professionals offers various types of business loans and lines of credit for small business startups as well as established business owners. Contact the LenCred team for obtain details.