Best Business Acquisition Loans
We analyzed 25 lenders to find loans with competitive rates and high funding limits for buying a business.
Learn more about how we chose our picks.
Best business acquisition lenders: More details
What is a business acquisition loan?
A business acquisition loan is a loan that’s used to buy an existing business, buy out a business partner, open a franchise or purchase assets from another company.
Traditional banks, credit unions and online lenders offer various small business loans that can be used to cover acquisition expenses, such as purchasing equipment, transferring business ownership or opening additional brick-and-mortar retail shops.
Business acquisition loans are often used by existing businesses to finance their growth plans. For example, a business acquisition loan might be used to acquire a competitor or purchase a second business as part of an expansion plan. Because most lenders require business history to qualify, these loans usually aren’t ideal for buying your first business. If you’re looking to purchase your first business, you may want to consider alternatives.
Types of business acquisition loans
There are multiple ways to finance a business acquisition, including non-SBA business acquisition loans. Options include:
1. Term loans
Traditional term loans can be another great way to fund business acquisitions and franchise purchases. Banks, credit unions and online lenders provide term loans with a lump sum at fixed or variable interest rates. Borrowers with good to excellent credit scores are more likely to secure lower interest rates with more flexible repayment terms.
Short-term business loans can typically provide anywhere from a few thousand dollars to a million or more, with repayment terms typically ranging from three to 24 months. If you need more breathing room with your debt repayment schedule, long-term business loans offer terms of up to 10 or more years.
Requirements for term loans vary by lender but they typically require your business to operate for a minimum of six months with $30,000 or more in annual revenue. You may also need to provide collateral or sign a personal guarantee to reduce lender risk.
2. SBA loans
Backed by the U.S. Small Business Administration (SBA), the SBA 7(a) loan is a type of term loan that can be used to purchase a business or franchise. If you meet the SBA loan requirements, you can borrow up to $5 million with competitive interest rates and terms up to 25 years.
Although the SBA oversees the SBA loan program, you must apply directly through a bank or online lender offering SBA funding. You will likely need to provide a down payment of 10% to 30% when securing acquisition financing.
Note that SBA loans have an extensive approval and funding timeline — approximately 30 to 60 days or up to 90 days for commercial real estate loans. You can reduce this time to as short as two weeks or less by working with an SBA-preferred lender.
SBA 7(a) variable loan interest rates
| Loan amount | Rate standard | Variable maximum allowable (with current prime rate) |
|---|---|---|
| $0 to $50,000 | Base* + 6.5% | |
| $50,001 to $250,000 | Base* + 6% | |
| $250,001 to $350,000 | Base* + 4.5% | |
| $350,000 or above | Base* + 3% |
3. Lines of credit
You could also fund a business acquisition through a line of credit. Business lines of credit give you access to funds on a revolving basis, allowing you to make withdrawals as needed. While it’s common for lenders to provide lines of credit up to $250,000, some lenders offer more sizable credit lines, which could provide you with enough funds to purchase a business outright.
Business lines of credit can also be helpful for covering cash flow gaps down the road. You typically only pay interest on the funds you actually use, so a line of credit can provide easy access to extra cash while minimizing the risk of borrowing more than you really need.
Pros and cons of acquisition financing
While acquisition financing can help many business owners acquire new companies or expand with a franchise, it’s essential to weigh the pros and cons to see if it’s a good fit for your situation.
Pros
-
May help broaden your business
A business acquisition could diversify your business holdings and generate new revenue streams, and a business acquisition loan may make it easier to fund your purchase. -
May allow you to capitalize on a limited-time opportunity
Many lenders offer quick business loans that can approve and deliver your funds within two to four business days, which could allow you to move quickly on a lucrative opportunity. -
May free up cash flow for other business expenses
Many lenders offer business acquisition loans with lengthy terms, allowing you to spread out your payments and put available funds toward other costs.
Cons
-
Higher leverage may mean higher risk
Higher debt levels can put your business at risk, especially if you borrow more than you can realistically afford to repay. If you’re purchasing a second business, you could put the assets you already have at risk by taking on a loan. -
Interest rates can affect your bottom line
Newer businesses and startups might end up paying higher rates since they pose a greater risk to lenders. But even with favorable rates, loan costs can impact your business cash flow. -
May have stipulations or restrictions
Depending on the loan type and lender, you might have to follow specific rules. For example, the SBA 7(a) loan requires that the previous owner doesn’t maintain any stake in the business and that you’ve exhausted other financing options before pursuing this option.
How to get a loan to buy a business
To get a business acquisition loan, you’ll need to:
1. Evaluate the business’s worth
Requesting a business valuation can determine a company’s worth, helping lenders assess how much capital they feel is appropriate. For example, you might have difficulty convincing a lender to approve your $350,000 acquisition loan if the business you want to purchase has a value of only $50,000. In contrast, buying a business valued over $100,000 with a steady income stream could reassure lenders that you can likely handle the loan payments.
While business valuations can be calculated in different ways, here are three popular options:
-
Market-based valuation
This method compares your business to similar companies in your industry and works best when your services, prices and operations are standard for your industry. -
Asset-based valuation
This approach requires a deeper analysis of a business’s assets and its net worth. A restaurant, for example, may have expensive kitchen appliances, shatter-resistant dishes, pricey booths and tables and a large inventory of vintage wine. -
Income-based valuation
Here, the focus is on how much cash flow your business might generate in the future. While there’s no way to assure this, a solid financial history with an upward projection for revenue is a good sign for lenders.
2. Get a signed letter of intent
It’s common practice for the buyer and the business seller to sign a letter of intent outlining the specific steps both parties will take to move forward with the arrangement.
While a letter of intent may not be legally binding, it can show lenders you’re serious about moving forward with the sale. Lenders may hesitate to approve your business acquisition loan if it seems like you and the seller aren’t on the same page.
An attorney can help draft a letter of intent, which both parties will sign.
3. Review your credentials
While specific business loan requirements can vary by lender and loan type, lenders typically review the following criteria when assessing your loan application:
- Credit score: Having a good personal and business credit score can increase your chances of getting approved for a business acquisition loan. While some lenders accept scores as low as 600, a higher score will likely unlock better rates and more flexible terms.
- Time in business: Many lenders require your company to operate for at least two years before you can qualify for business acquisition financing, making this a better option for an existing business owner purchasing a second business or buying out a partner.
- Annual revenue: Lenders generally want to see your company generating a steady cash flow to reassure them you can handle debt repayments. While having an annual revenue of $100,000 or higher could strengthen your loan application, some lenders don’t impose minimum revenue requirements.
4. Compare lenders
After finding business acquisition lenders that fit your criteria, you can dive deeper to learn about their fees, rates, customer support and more. Reading business lender reviews in advance can help ensure a lender is legitimate before you sign the dotted line. Some lenders also offer perks, like rewards programs and early payoff discounts.
5. Gather necessary documents
Organizing your business paperwork in advance can help ensure you have everything you need before applying. While exact requirements vary by lender, here are some common loan documents many lenders require:
- A recent business valuation
- Recent tax returns for the business you’re planning on purchasing
- A current profit and loss (P&L) statement from the existing business
- A proposed bill of sale, which must include the terms of sale
- The asking price and the schedule of inventory, equipment and furniture
- Projected financial statements, detailing a one-year income projection with a written explanation of how you plan to reach it
- Information about the business’s ownership and any affiliations
- Copies of business certifications and licenses
- Your personal and business tax returns from the previous three years
- A business plan outlining how you plan to use the funds
6. Apply and review offers
You can usually submit a business acquisition loan application online, although some traditional banks may require an in-person visit to finalize the paperwork.
If approved, make sure to thoroughly review the business loan agreement before moving forward. Now is the time to ask questions about repayment schedules, interest rates, additional fees and acceptable ways to use the funds.
How to choose a business acquisition loan
There are numerous options to choose from when looking for a loan to buy an existing business or a franchise. Here is a breakdown of what to consider when comparing your financing options.
Interest rate
While rates will vary based on your personal and business qualifications, shopping around can help you find the deal that best fits your budget.
Repayment term
Picking a longer term can help make your monthly payments more manageable, but you will likely end up paying more interest over the long run. If your budget can afford it, opting for a shorter term can save you more.
Time to fund
Ask the lender how long it typically takes to have funds deposited into your account. If you need access to capital fast, going with an alternative lender can help you save time. In contrast, an SBA loan to buy a business could take several months to process.
Additional fees
Some lenders and loan types, such as the SBA 7(a) loan, charge additional fees. These can include origination fees, late payments and prepayment penalties.
Collateral
Some business acquisition loans are secured business loans, meaning you must secure them with collateral, such as equipment, real estate or cash. If you fail to repay the debt, the lender could seize your collateral to repay the debt.
Alternatives to business acquisition financing
A loan isn’t your only option to purchase a business or franchise. These alternatives can be used to fund a business acquisition, or to cover startup costs and working capital expenses while your business is still new:
- Venture capital: Another option for funding an acquisition purchase is venture capitalism, which is where investors contribute funds in exchange for a piece of ownership in the business. While you don’t have to pay interest or repay the investment, you essentially give up a portion of your business’s equity.
- Crowdfunding: You can collect donations from friends, family and the general public via a crowdfunding platform, like Kickstarter or Fundable. While crowdfunding platforms typically deduct a small fee for their services, you don’t have to pay anything to run a campaign and receive donations.
- Small business grants: A range of small business grants are available through state and federal government agencies and private corporations, which could help cover some of the costs of buying an established business.
- Seller financing: In some cases, the person selling the business might be willing to lend you money through a seller financing agreement. Just keep in mind that seller financing can mean paying a higher purchase price and interest rate, and some sellers may want to have continued involvement with the business.
Frequently asked questions
It depends on the loan type and what your score is.
Lenders typically require personal credit scores in the mid to high 600s to qualify for business acquisition financing, while SBA lenders may like to see scores of 650 or higher. Some alternative lenders offer bad credit business loans to borrowers with scores as low as 500, with funds covering a range of business acquisition expenses. However, these loans tend to come with higher interest rates and less favorable repayment terms.
It depends on your qualifications, the valuation of the company you want to buy and the type of business loan. For example, SBA 7(a) loans can go up to $5 million, while term loans typically range from $2,000 to $1.5 million or more.
Our business loan calculator can estimate your potential borrowing power to help you explore options.
It’s possible, but generally you’ll need at least some money to put down. Providing a down payment for your business acquisition loan can help improve your chances of approval while helping unlock better rates and more flexible repayment terms.
There are financing options for startups with no money, such as equipment financing, accounts receivable financing, microloans and credit cards. While some of these options could help fund business acquisitions, or cover part of the expenses, they’re typically better suited for general working capital costs.
Our methodology: How we chose the best business acquisition loans
We analyzed more than 25 lenders to find the overall best business acquisition loans. To make the cut for our best picks, the lenders we chose had to meet the following criteria:
- Loan use: Some lenders don’t allow their small business financing to be used for business acquisitions. We looked for lenders who don’t set these kinds of limitations, favoring lenders with loan products specifically designed for buying a business and/or lenders that allow businesses to use loan funds for any purpose.
- Loan amount: Because buying a business is often expensive, we looked for lenders offering loan amounts that are sizable enough to complete this type of transaction.
- Rates and terms: We prioritized lenders with competitive fixed rates, fewer fees and greater options for repayment terms.
- Repayment experience: We considered each lender’s reputation and business practices, favoring those that report to all major credit bureaus, offer reliable customer service and provide unique perks to customers.