Acquiring a new business can be an excellent investment that diversifies your portfolio and garners attractive returns in the future. Financing your new acquisition wisely, however, can take fitting together a few moving pieces. Whether you’re purchasing an existing company or buying a new franchise, review your options for how to finance the acquisition to your best advantage.
Take Out a Business Acquisition Loan
Specific loans exist for individuals wishing to buy businesses or open new franchises: business acquisition loans. These loans have benefits tailored uniquely for people purchasing new businesses, such as equipment financing and startup loans. The four most common types of business acquisition loans are:
- Small Business Association (SBA) 7(a) loan. An SBA 7(a) loan guarantees up to 85% of loans from most lenders.
- Term loan. This type of loan provides a lump sum amount that the borrower repays over a certain time with interest.
- Startup loan. If you’re acquiring a business, a startup loan with special benefits might be the right choice for you.
- Equipment loan. Take care of one of the main expenses when acquiring a business with an equipment loan. Get money up front to purchase an existing company’s equipment.
A business loan might be the right option if you have good credit, other assets, and don’t want to pay for the costs out of pocket. Keep in mind that you will likely have to show the lender that you have experience in the industry in which you’re buying a business. Lenders will not provide loans if they don’t think you’re a safe bet.
Combine a Loan With Your Own Funds
Taking a mixed approach to business acquisition financing can help you avoid unnecessary debt and interest payments. If you have the funds in savings accounts or home equity, using a combination of your own money and business loans might be the right choice. This approach can also help you acquire larger companies than you would be able to do with your own funds alone.
Consider a Leveraged Buyout
Leveraged buyouts involve acquiring a company using borrowed money to cover the initial costs. The collateral to qualify for the loan is typically the assets of the company acquired. Keep in mind, however, that leveraged buyouts can come with risks as well as benefits. If the deal runs into issues, the buyer can absorb the maximum amount of losses.
Contact Bruce E. Turner with Bennett, Weston, LaJone & Turner, P.C., for more business acquisition advice.