What Is Acquisition Financing and How Does It Work?
How many times have you heard the phrase “expectation vs. reality?” It’s a common saying that is often directed at people who are new to the real estate market, or any other industry for that matter.
The idea behind it is simple: expectations are usually too high, and it leads to disappointment when they don’t come true. That same idea is applied to financing your next business purchase with a business acquisition loan.
What is Acquisition Financing?
Business acquisition financing is a type of loan with which an acquirer can purchase a company’s equity from its owner. This way, the buyer gets 100% ownership of the company without paying for it in one lump sum. It would be best to have at least 35-50% equity in your business and a good credit score to get acquisition financing.
The good news is, in most cases, acquisition financing can be obtained much more quickly than traditional financing because the process doesn’t go through underwriters. Additionally, it usually takes less time from application to closing.
You can often get an acquisition loan through your existing financial institution. According to Lantern by SoFi, acquisition financing is an excellent way to make your company’s purchase more manageable by making it affordable in monthly payments that are much smaller than what you would pay for if you were using another type of financing.
How Does It Work?
A lender provides a business acquisition loan to an acquirer, known as the borrower. The purpose of this loan is for the acquisition or purchase of one business from another. The borrower will use all available cash and assets to come up with additional funds needed for closing costs and any other related expenses that may be required during the process.
On the other hand, the seller in the deal will benefit from a quick and easy payout without waiting months or years for their money. The process works when buyers purchase companies using cash, assets, or financial sources such as loans. The latter allows them to pay all of the costs associated with buying another business, like taxes and fees due upon closing.
The acquisition term loan enables a company to buy another firm or brand with the use of their own money and bank financing. For these types of loans to be granted, they must meet specific criteria such as having at least 35-50% equity in the business, a solid credit score, and a monthly income close to double what you are asking from the loan.
When it comes to the operational line of credit, acquirers can use it to make large purchases or investments in equipment, inventory, and marketing initiatives. This type of loan is also given after the company passes underwriters’ criteria for creditworthiness.
Lastly, the guidance line of credit is specifically for those looking to buy a company from another owner. The borrower uses this type of financing by selling their business and then buying it back, frequently with the same lender or financial institution.