What is a business acquisition loan? This type of loan refers to the funds which are borrowed when one intends to purchase or merge with another business. It might be either by a private equity or a stock purchase. The lender takes note of certain factors before the applied loan is approved. The borrower’s credit history is not the only factor which is taken into consideration.
The lenders also consider the cash flow and condition of the acquired and the acquiring business during the time when the purchase is made. The management experience of the borrower is also considered since the lenders are trying to make sure that the borrower has the experience which can help him maintain the acquisition. You should also take note that this type of loan is a long term one. If real estate is included in the acquisition, 25 years may be the maximum term for this type of loan.
There are a lot of trials which a borrower would surpass before he is able to secure the business acquisition loan. Financing goodwill is one of the trials which a borrower has to outdo. What is goodwill? This stands for the profit which the business is expected to reap in the future. The profit should be more than the existing value of the asset.
There are a lot of lenders who are wary so they deviate from financing goodwill. Because of this, the amount of the necessary down payment which must be given so that the sale will be completed becomes higher. The borrower also has to solve the problem of the business transition risk. The transition risk is about the capability of the new owner to manage the business in the same manner (or in a much better manner) done by the previous owner. It also includes whether the employees will be terminated since there is already a new owner or if they will continue to work with the company.
The borrower should also work hard in order to convince the lender that there is a growth potential in the business. The condition of the business will greatly affect the acquisition loan. It should be determined if the business which is being sold is a mature one, declining market segment, or a new and rising business enterprise. This should be determined so one can anticipate how the change in owners will affect the business. Will the change of owners weaken the business or will it strengthen the market position of the business?
One of the reasons why a business acquisition loan is not granted is because the lenders are certain that the business will not thrive. Since the business will not be successful, the borrower may encounter difficulties in giving payments for the loan. Aside from that, a business which is improving will have a higher probability of being purchased again when it is placed into the market for resale. If you are hoping to apply for this loan, be sure that you know the truth about it so that you will not find yourself in trouble.