Compare Small Business Loans
If you plan on using a loan to purchase or acquire a business, you'll want to be sure that you're using the right business acquisition loan for your needs. Loans can vary greatly, and there are a number of different options to consider.
What Is a Business Acquisition Loan?
Business acquisition loans are used to help purchase an existing business or franchise. Their use cases are relatively straightforward, but there are a number of other important factors to consider.
The business acquisition loans that we'd recommend come in the form of term loans, equipment financing or customized financing set up by the seller. These tend to be the largest forms of financing available to borrowers.
The Best Overall Option: SnapCap
- Loan amount: $5,000 - $1,000,000
- Rates: 19.99% - 49.99% APR
- Term: 3 - 36 months
- Min. credit score required: 500
Why we like it: SnapCap isn't a direct lender but a marketplace where borrowers can compare multiple options with just a single application. We always recommend borrowers shop around before settling with an offer, and this is the fastest and easiest way to ensure you commit to a loan with the best terms and rates.
An additional benefit to SnapCap is that qualified borrowers are given a concierge who walks them through the end-to-end process of selecting a loan that's right for their business. SnapCap is the only marketplace that partners with a high number of lenders and also provides this service.
Drawbacks: There are a few lenders that SnapCap doesn't partner with and will require separate applications. SnapCap is fairly comprehensive in its list of partners, but it doesn't partner with every single lender available.
The Best Business Acquisition Loan for Bad Credit: QuarterSpot
- Loan amount: $5,000 - $250,000
- Rates: 20.00% - 48.00% APR
- Term: 9, 12 or 18 months
- Min. credit score required: 550
Why we like it: QuarterSpot loans offer the right blend of size and lenient eligibility requirements for poor credit borrowers looking to acquire a business. With a poor personal credit score, it's very difficult to qualify for a loan.
It's even harder to qualify for a sizable loan that'd give enough flexibility to acquire a business. However, QuarterSpot only requires a credit score of 550 and also offers loans from $5,000 - $250,000. This is far higher than lenders who offer loans with comparable eligibility requirements.
Drawbacks: While QuarterSpot's loans may be larger compared to similar lenders, $5,000 - $250,000 is still a relatively small amount to use to acquire a business. If that's not enough, you'll need to heavily supplement the financing with your own cash reserves.
Also, make sure you can afford QuarterSpot's higher cost of financing. Rates fall in the middle compared to other online lenders, but they're relatively high when compared to the cost of loans from banks.
The Best Business Acquisition Loan for Good Credit: OnDeck
- Loan amount: $5,000 - $500,000
- Rates: 9.30% - 99.70% APR
- Term: 3 - 36 months
- Min. credit score required: 600
Why we like it: OnDeck's larger loans make it an ideal option for businesses looking to execute an acquisition. OnDeck is one of the few lenders to offer such lenient requirements and also offer loans of this size.
We recommend OnDeck specifically because it also offers fast financing, discounts for repeat borrowers, and it is one of the most popular online lenders, ensuring that it offers a pleasant user experience.
Drawbacks: APRs can be extremely high for risky borrowers. In order to ensure that rates are as low as possible for your loan, we recommend only applying if you have good personal credit, high cash flows and no bankruptcies or liens on file.
Additionally, keep in mind that OnDeck enforces a prepayment penalty. It might advertise a 25% prepayment discount if you pay your loan off early, but in that case, you're still responsible for 75% of the original interest payment. Many other lenders don't enforce such a rule and allow for the rest of the interest payments to be void.
The Best Business Acquisition Loan for Excellent Credit: SBA Business Acquisition Loan
- Loan amount: $30,000 - $350,000
- Rates: 8.25% - 9.25% APR
- Term: 10 years
- Min. credit score required: 650
Why we like it: The SBA's 7(a) loan program is best known for its low cost of financing, flexibility and large limits. The 7(a) loan can be used for business acquisition purposes. It's likely the largest loan available on this list, and it'll be tough to find a cheaper option in the market.
We specifically recommend applying through SmartBiz because it expedites the notoriously slow process of obtaining an SBA loan. The process will likely be far longer than the extremely short processing times you'll find at other online lenders, but SBA loans are worth the wait if you can afford it.
Drawbacks: The SBA doesn't lend directly to borrowers and instead works with traditional lenders like banks to lend through them. This makes qualifying for an SBA loan extremely difficult, as banks tend to only approve those with an excellent personal credit score, high age of operations and extremely strong cash flows. Businesses like start-ups or those with owners who have weaker credit scores are not recommended to apply.
In addition, the application process can be quite lengthy and often takes weeks to months if you go through traditional channels. SmartBiz helps expedite that process, but if you can't find a match through SmartBiz, you'll need to go directly through banks instead. Also, if the business you're looking to acquire is a franchise, be sure the franchise is on the SBA's approved list.
Other Financing Options to Consider
If you’re looking to avoid debt financing or a term loan, we discuss some other options for buying a business below.
Seller Financing and Franchisor Financing
- Offers flexibility
- Usually the fastest way to close a deal
- Terms may be more favorable to seller
- Flexibility may lead to lack of structure in terms
There are two reasons we like seller financing to acquire a business: There is a lot of flexibility, and it’s one of the fastest ways to close on a deal. In a seller financing deal, you negotiate a loan directly with the seller of the business and have more opportunity to obtain favorable terms when most lenders have fixed terms. You put a down payment on the business, which could be as high as 50%, and then pay the remaining amount plus interest to the seller.
Payments can either be fixed or, in what is called an earn-out, based on the business’ performance. The earn-out option can be a mutually beneficial choice, as the buyer can pay less in lower sales months, and as the seller is invested in the business’ growth.
If you’re buying into a large and well-known franchise, we recommend franchisor financing as one of the fastest ways to get funding. In many cases, franchisors may offer direct financing to franchisees or partner with specific lenders to provide funds. Going through your franchisor may also save you on franchise fees. Depending on what franchise you’re opening, you’ll need to check their website and documents for more information.
- No taxes on withdrawn funds
- 2-3 weeks to close
- Risking retirement funds
- Ongoing maintenance fees
One popular option among franchisees is using your retirement funds to purchase or start a business or franchise by paying a third-party provider to set up a ROBS plan. However, a ROBS plan is only viable if you have enough money in your retirement accounts to cover the cost of the business or franchise outright.
For many franchises, you may need to have $500,000 to $750,000 in liquid assets to open a new location. And even if you do have enough money, you’ll need to ask yourself if you’re OK risking your retirement savings on a new business. If the business goes under, you’ll have no recourse to recoup your investment.
Investor or Partner
- Can close on a deal quickly
- May have to give up equity and control of business
- Relationship could turn bad
If you can’t put up all of the funds to buy a business but have the chops to run it successfully, consider finding a partner or investor who can. You may have to give up equity in the business to secure an investor or partner, which means that you lose complete control over the company. However, for some individuals, this is a small price to pay for debt-free financing.
Keep in mind that in many cases, equity financing can often be far more expensive than debt financing in the long run. Splitting ownership of your business isn't something that should be taken lightly. It's a quick way to get a large infusion of cash but it comes at a cost.
- Low interest rates
- Risking home if you cannot repay
- Must have significant equity built up in your home
Home equity loans or lines of credit allow for homeowners to borrow against the amount of equity they have built up in their homes. In other words, the amount of equity is a huge determinant in how much you can borrow. Home equity is the delta between the market value of the home and the remaining mortgage debt to be paid off.
We'd only recommend going down this route if you've determined that you cannot utilize a traditional small-business loan and are comfortable with risking your home in your venture. If you cannot meet your home equity loan payments, your lender will foreclose your home.
- Most personal loans are unsecured
- Low loan amounts (generally under $50k)
- Will need great credit to qualify for decent interest rate
Personal loans are typically much smaller than a business loan and likely cannot help finance an acquisition entirely. Personal loans should only be used to help supplement whatever cash you have on hand.
Also keep in mind that personal loans tend to have higher rates than business loans from banks but lower rates than business loans from online lenders. If you have an excellent credit score and cannot get approved by a bank because the amount that you're seeking is too low, a personal loan might be right for you. If you have a poor credit score, an online business loan might be a more suitable option.
A benefit of personal loans is that they're much more regulated than business loans, which means that rates and terms are usually clearly spelled out by lenders before you apply. This isn't always the case with online small-business loan lenders who are notorious for masking their rates or making information harder to find.
Business Acquisition Financing: The Top Options Summarized
There are a number of different ways to finance an acquisition. If you have less than stellar financials, completely financing your acquisition with an external source is going to be very difficult. In that case, supplementing your own cash with financing is more likely.
How to Get a Business Acquisition Loan
Lenders will care about two things when you apply for a business acquisition loan: you and the business. For you, the lender will care about your:
- Personal credit score: Having a FICO score above 680 will make it easier for you to get approved and get a low interest rate.
- Related experience and value add: You need to show the lender that you bring something valuable to the table, whether this is through lots of relevant experience, a specific set of skills and/or a strong business plan. Your lender will want to see your personal resume.
- Business plan: You need to have a well-defined, logical strategy to take the business to the next level, and this should be laid out in your business plan.
For the business you’re buying, a lender will look at the following factors:
- Business credit score: The business should have an established history of paying vendors and suppliers on time.
- Current and past business finances: The lender will look at the company’s balance sheet, profit and loss statements, tax returns, current debt service and cash flow analysis to get a sense of the strength and viability of the company.
- Financial projections: You will need to produce financial projections on revenue and sales for the next two years.
- Business valuation: As discussed earlier, you will likely need to hire an independent firm to conduct a valuation of the business.
Your job when applying is to make it easy for the lender to approve the loan by either meeting all the points above with documentation proof or to address some of these head on. You want to show the lender that you are buying an established, successful business and that you have the skills and strategy to grow the business even more.