Key Takeaways
Lack of due diligence sinks many deals: Most failed acquisitions stem from buyers skipping financial reviews or failing to verify information, not from bad businesses.
Start with a clear financial plan: Know your budget, funding sources, and working-capital needs before you start shopping for a company.
Stay objective and data-driven: Avoid emotional decisions; rely on accurate numbers, professional advisors, and realistic expectations to make a smart purchase.
How Acquisition Loans Work
Most acquisition loans are term loans: you borrow a lump sum, pay interest, and repay the principal over a fixed term. Some buyers may also use lines of credit during the acquisition process for working capital or transitional expenses.
The amount, interest rate, and term depend on your lender and credit profile. Stronger borrowers can qualify for lower rates and longer repayment terms.
Top Funding Options for Buying a Small Business
1. SBA 7(a) Loan
The SBA 7(a) loan is one of the most popular and flexible tools for business acquisitions. Backed by the U.S. Small Business Administration, it allows banks to lend with less risk — resulting in favorable terms for buyers:
- Loan amounts up to $5 million
- Terms up to 10–25 years
- Competitive interest rates (typically prime + 2.75%)
- Down payment around 10%
To qualify, you’ll generally need:
- A credit score of 650+
- At least two years of business experience
- Strong cash flow and financials
The SBA 7(a) can finance full acquisitions, partner buyouts, and franchise purchases.
Pro Tip: PGCOC’s blog on the SBA 7(a) Loan gives a more in depth explanation.
2. Traditional Bank Loans
If you have excellent credit and solid financials, a bank or credit union loan may offer low interest rates and long repayment periods. However, expect stricter requirements and a longer approval process. Banks often require collateral, strong business history, and a personal guarantee.
3. Online and Alternative Lenders
For faster approvals or less-than-perfect credit, online lenders can be a viable option. These loans often fund within days, though they come with higher interest rates and shorter terms (often 2–5 years). They’re useful when speed matters or when supplementing other financing sources.
4. Seller Financing
In many acquisitions, the seller helps fund the purchase by allowing you to pay part of the price over time. This is called seller financing or a seller note.
Benefits include:
- Easier qualification
- Flexible repayment
- Alignment of interests. The seller wants the business to succeed
Seller financing can also improve your chances of getting an SBA loan since it reduces the upfront capital you need.
5. Investor or Search Fund Financing
An emerging model, especially among MBAs and experienced professionals, is Entrepreneurship Through Acquisition (ETA). With this approach, investors back an entrepreneur’s search to acquire and grow an existing small business.
Search funds and private investors can provide the equity portion of your financing, complementing debt from a bank or SBA loan.
Learn more with PGCOC’s blog on how to spot hidden risks in business acquisitions.
PGCOC's Entrepreneurship Through Acquisition Accelerator
How to Qualify for Acquisition Financing
Follow these key steps to strengthen your financing application:
- Get a Business Valuation: Independent valuations help lenders assess the business’s worth and your loan size.
- Gather Financial Documents: Include tax returns, balance sheets, profit and loss statements, and cash flow reports for both you and the target business.
- Provide a Letter of Intent (LOI): Outlines the sale terms and shows lenders the deal’s structure.
- Show Relevant Experience: Lenders want to know you can manage the business effectively.
- Prepare a Strong Business Plan: Detail your strategy for operating and growing the business under your ownership.
Pro Tip: A well-prepared buyer who understands both the numbers and the narrative earns lender confidence faster.
Alternative Financing Strategies
If traditional or SBA loans aren’t right for you, consider these creative options:
- Equipment Financing: Finance specific assets or machinery tied to the business.
- Franchise Financing: Some franchisors offer direct funding or partnerships with preferred lenders.
- Investor Partnerships: Equity partners can provide capital in exchange for ownership or profit sharing.
- Self-Funding: Using personal savings or retirement funds (via a ROBS arrangement) can be risky but effective when handled wisely.
Final Thoughts
Buying an existing business is often less risky and more scalable than starting one from scratch. With the right acquisition financing, you can leverage established cash flow, employees, and customers to build faster.
From SBA loans to innovative funding partnerships, small business acquisition financing opens doors for entrepreneurs ready to lead.
If you’re ready to start your journey, learn more about PGCOC’s ETA program and our success stories.
