Commerce and Management Sciences World

Commerce, Financial Accounting, Human Resource Management,, Cost Accounting, Principles of Business

img

What Are The Requirements of a Business Acquisition Loan?

/
/
/
0 Views

business acquisition loan requirementsIn my previous article about financing a business acquisition I went over six ways that you could finance a business purchase. In the article, I mentioned that a common way to finance the purchase of a business is to get an acquisition loan through the Small Business Administration (SBA). SBA guaranteed loans are offered by banks in partnership with the SBA and are designed to help entrepreneurs who need funding.

Although they are easier to get than conventional bank loans, banks still go through a thorough underwriting process. As a rule, they only provide a loan to buy a business that has the assets and cash flow to repay it. Furthermore, they only lend money to individuals that have experience in the industry and who have some assets. In this article we discuss the requirements to get an SBA business acquisition loan.

1. Executed letter of intent

You should start researching banks at the same time you are looking for acquisition targets. However, a lender will only provide you with a term sheet if you have a signed letter of intent (LOI). Some individuals see this as a catch 22. They don’t want to look for businesses without a term sheet in place. However, banks don’t want to provide terms unless there is an LOI in place. How do you solve this?

The answer is simple. A well-crafted LOI always contains a section that advises the seller that the offer is contingent on the buyer being able to find adequate financing. If they can’t find financing by a certain date, the offer just falls through. This is a common practice.

2. Your credit score

Your credit score an important part of qualifying for an SBA loan. This is because most lenders (fairly or not) see your personal credit as a proxy for your financial behavior. Guidelines require a minimum score of 650. Obviously, higher is better.

3. Form 413 – Personal Financial Statement

You can find the form here. It contains personal financial information about yourself, your partners, and any prospective owner of the company with a minimum of 20% equity. This form is used to determine your credit worthiness and your ability to repay the loan. Remember that the SBA acts as a last-resort guarantee. If things go sideways, banks will first try to collect from you and the business.

This form can look intimidating. Don’t let’it intimidate you. The whole purpose of the SBA is to help individuals get the funds they need.

4. Form 1919 – Borrower information form

You can find the form here. This form is used to collect information about you and other key individuals/partners that are interested in purchasing the business.

5. Three years of business financial statements

Your application must include three years of business statements for the business you plan to acquire. This includes Balance Sheets, Profit and Loss statements and cash flow statements.

6. Three years of corporate and personal tax returns

Your application must include three years of corporate tax returns on the business that you plan to acquire. Additionally, you must also include your personal tax returns, and the tax returns of all your partners.

7. Debt Schedule

A debt schedule must be submitted with the application. This lists the sellers business’s debts/liabilities.

8. Debt Service Coverage Ratio (DSCR)

To qualify for a business acquisition loan, the business must have a DSCR of 1.15. The higher the ratio, the easier it is to get a loan. This is because this ratio determines the amount of cash that can be used to pay debts, interest and leases.

9. Management experience

To qualify for a business acquisition loan, either you and (all|some) of your partners must have substantial experience in the industry of the business that you intend to acquire.  This is an important requirement. Showing your expertise to the lender is key in helping them perceive you as a safer risk.

10. Down payment

Generally, most SBA loans require a down payment of 20%. This means that 20% of the purchase price of the business you plan to acquire must come from your assets, your partner assets, or minority investors. The down payment shows the lender that you are committed to the business and that you have “skin in the game”. The down payment can often be reduced to 10% if you can get some seller financing to cover the difference and if the seller is willing to take a two year standstill on the note.

Conclusion

Find detailed information about business acquisition loan requirements. If you are looking for funding, please read this article about getting an acquisition loan.

  • Facebook
  • Twitter
  • Google+
  • Linkedin
  • Pinterest

Leave a Comment

Your email address will not be published. Required fields are marked *

It is main inner container footer text