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Businesses that already have customers, staff, and revenue often come with high price tags. While it can be easier than starting a business from scratch, most don't have enough cash to pay for the whole thing at once.
I've spent my whole career in alternative finance, and this is where I've seen business acquisition loans carry their weight. It's financing used to buy an existing company. Below, I cover the loan types available and what lenders look for.
Types of Business Acquisition Loans
These are the main types of business acquisition loans that can help you cover a purchase.
SBA loans
U.S. Small Business Administration (SBA)-backed loans are a common type of financing used in acquisitions. These loans have a maximum amount of $5 million and can be extended for up to 25 years.
Short-term loans
Term loan financing can fill a gap in a deal or assist in the transition process. This option provides approval much quicker than traditional banking options.
Lines of credit
A line of credit isn't an asset purchase transaction, but it will cover operating expenses (payroll) and working capital during the transition phase. You only pay interest on the funds that are drawn from the account.
Equipment financing
If the sale includes trucks or machinery, this type of loan will finance specific items. The purchased item will serve as the collateral.
How Business Acquisition Loans Work
You apply for a business acquisition loan with two sets of financials, both yours and the company you plan to acquire. Lenders want your tax returns and credit history, plus the target company's profit and loss statement, balance sheet, and tax returns. Our guide to getting a loan to buy a business covers the full process from start to finish.
Expect to put some money down. A U.S. Small Business Administration (SBA) 7(a) change of ownership requires a minimum equity injection of 10% of the total project cost. Conventional lenders typically ask for 20% to 30% down.
Repayment depends on the loan terms. SBA 7(a) loans run up to 10 years for most acquisitions and up to 25 years for real estate.
What Lenders Look At
Every lender's qualifications look different, but they typically care about the same short list.
Personal credit score
This varies depending on the lender. At Clarify Capital, to qualify for a short-term business loan, you need a credit score of 550. For business lines of credit, you need a minimum score of 600. Higher scores help you secure better terms.
Your down payment
Typically, lenders will want 10% of the purchase price for a small business acquisition through an SBA loan and 20% to 30% for most commercial loans.
Business cash flow
Lenders want to see that the business you're purchasing (and your current business) has adequate cash flow to make new loan payments.
Your experience
Is this your first time operating a restaurant, or do you have 25 years of experience? It makes a difference to lenders.
Collateral
SBA lenders take collateral for every loan larger than $50,000.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
What a Business Acquisition Loan Costs
The purchase price is just the start. Here's what else to consider.
Fees and Interest Rates
The fees you can expect to pay include origination fees, which typically run 1% to 6% of the loan amount and are charged up front.
If you're applying for SBA 7(a) financing, you'll also pay an SBA guaranty fee. The lender charges it on the guaranteed portion of the loan, not on the full amount, and lenders often pass it to you.
Prepayment penalties apply to SBA loans with terms of 15 years or more if you pay off 25% or more in the first three years. The fee is 5% in year one, 3% in year two, and 1% in year three.
The other cost to consider is the interest rate. The amount of interest you'll pay on a business acquisition loan depends on the type of financing and the lender you're working with. At Clarify Capital, interest rates start at 6.75% for SBA 7(a) loans.
Legal and Due Diligence Costs
A professional business valuation is an important part of the closing process. This will run you anywhere from $3,000 to $8,000, and more if it's a more complicated deal. You'll also pay attorney fees, which range from $500 to several thousand dollars.
Estimated Monthly Payments
Below, I've broken down what a $500,000 business acquisition loan looks like at current rates. Your Clarify lending advisor can show you payment scenarios based on your actual qualifications.
| Loan type | Interest rate | Repayment term | Estimated monthly payment |
|---|---|---|---|
| SBA 7(a) loan | 9.75% | 10 years | $6,539 |
| SBA 7(a) loan including real estate | 9.75% | 25 years | $4,456 |
| Traditional bank loan | 9.00% | 7 years | $8,045 |
Why SBA 7(a) Loans Fit Most Acquisitions
The 7(a) program lends against goodwill. That's more than just a euphemism.
The SBA guaranty makes lenders more comfortable writing a loan. When you buy a small business, most of what you're paying for is the reputation, the customer list, and the trained staff. That doesn't have a liquid value or any collateral for lenders.
Here are a couple of other advantages:
Capped rates
Terms run up to 10 years, or 25 with real estate
Minimum down payment is 10% of total project costs
SBA loans do take longer to process (30 to 90 days), and the paperwork is hefty. Through Clarify Capital, you'll need a minimum credit score of 640 to qualify.
Other Ways To Finance an Acquisition
SBA 7(a) isn't the only way to finance an acquisition. Here are some other types of financing that I see clients reach for.
Seller financing
The seller carries part of the price, and you pay them back over time. Terms are often flexible, but expect to sign a personal guarantee
Equity financing
Investors inject capital into the business, and you give up some ownership.
Asset-based financing
Borrow against any receivables, inventory, or equipment already in the business.
Rollover for business startups
This lets you use retirement funds without early withdrawal penalties.
Home equity
A home equity line of credit (HELOC) allows you to borrow against your house at a lower rate than most business financing. Your home is collateral.
Franchise financing
If you're purchasing a franchise, you can often finance directly through a preferred lending partner.
Crowdfunding
Rare for acquisitions, but can be effective for brands with strong followings.
How To Structure the Deal
Pay close attention to the structure of your deal. It will impact your taxes, payments, and how much cash your business keeps. Here are some typical ones:
Seller note. Bridges the gap between your loan and the price. Keeps the seller invested in a smooth handoff.
SBA 7(a) bundle. Rolls real estate, equipment, and working capital into one loan at a single rate.
Earnout. Ties part of the price to future revenue or profit. This lowers your up-front risk, and gives the seller a reason to help you succeed.
Equity partnership. Brings in a partner to reduce the amount of debt you have.
Refinancing. Refinancing your target's debt into your acquisition loan can simplify repayment.
Ready To Buy Your Next Business?
Business financing doesn't have to be complicated. Clarify Capital connects small and midsized businesses (SMBs) with 75+ vetted, reputable lenders through one 2-minute application.
Apply today to see what you qualify for. Checking your options won't impact your credit score.
Frequently Asked Questions
These are the questions I hear most on business acquisition loans.
What Is a Business Acquisition Loan?
A business acquisition loan is financing used to buy an existing business or a share of one. The loan is underwritten against both your qualifications and the target company's cash flow.
Is It Hard To Get a Business Acquisition Loan?
It's easier than financing a brand new business, but expect to put in some work. Banks and SBA lenders want strong credit, real down payments, and detailed documentation. The process can take one to three months.
What Is the Payment on a $1,000,000 Business Loan?
This depends on the rate and the term. At 9.75% over 10 years, a $1 million loan runs about $13,077 a month. Stretch it to 25 years, and the payment drops to roughly $8,911, but you'll pay more interest.
How Do You Qualify for a Business Acquisition Loan?
It depends on the type of financing. In general, you need solid personal credit, a down payment, a business plan, and proof of consistent cash flow. Lenders will also look at your industry experience and credit history.
Can I Use an Acquisition Loan for a Partner Buyout?
Yes, SBA 7(a) loans cover partial changes of ownership. You'll need a buyout agreement, a valuation, and financials showing the company can support the payment.
How Long Does Approval Take?
Approval timelines vary. Online lenders can approve as quickly as same day or a few days. SBA loans typically take 30 to 90 days.
Is My Financial Information Secure When I Apply?
Yes. Clarify Capital follows SOC 2 security principles. Your information is only shared with lenders in our network as part of the matching process. Checking your options won't impact your credit score.
Bryan Gerson
Co-founder, Clarify
Bryan has personally arranged over $900 million in funding for businesses across trucking, restaurants, retail, construction, and healthcare. Since graduating from the University of Arizona in 2011, Bryan has spent his entire career in alternative finance, helping business owners secure capital when traditional banks turn them away. He specializes in bad credit funding, no doc lending, invoice factoring, and working capital solutions. More about the Clarify team →
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