Polarlens - Acquiring a small business loan for a business acquisition is a complicated process, regardless of whether the business is profitable or not. Each business acquisition loan is unique and comes with its own set of challenges.
However, there are some common hurdles that applicants will need to overcome to secure funding.
Financing Goodwill
One of the biggest challenges in securing a small business acquisition loan is financing goodwill. Goodwill refers to the intangible value of a business, such as its reputation, customer base, and brand name. It is often difficult to quantify, making it difficult for lenders to determine the risk of the investment. Therefore, most lenders are hesitant to finance goodwill.
Goodwill can be calculated as the sale price minus the resale or liquidation value of business assets after any debts owing on the assets are paid off. It represents the future profit the business is expected to generate beyond the current value of the assets. Most lenders have no interest in financing goodwill, which increases the amount of the down payment required.
Difficulties in Financing Unprofitable Businesses
Another challenge businesses face when seeking a small business acquisition loan is securing financing for unprofitable businesses. Even if the assets being acquired are worth substantially more than the purchase price, lenders can be difficult to find if the business being sold is not making money.
In such situations, lenders may require additional collateral or a personal guarantee from the buyer. The buyer may also need to show that they have a viable plan to turn the business around and make it profitable. The success of the business under the new ownership is critical for the lender to recoup their investment.
Managing the Due Diligence Process
The due diligence process is critical in assessing the viability of the business being acquired. It involves a comprehensive review of the financial statements, tax returns, contracts, leases, and other relevant documents. This process helps to identify potential risks and opportunities associated with the acquisition.
Buyers need to ensure that they provide complete and accurate information to the lender to facilitate the due diligence process. Any incomplete or inaccurate information can delay the process, and in some cases, cause the loan to be rejected.
Securing Adequate Collateral
Lenders require collateral to secure the loan in case the borrower defaults. However, not all businesses have adequate collateral to secure the loan. In such situations, buyers may need to pledge personal assets, such as real estate or investments, as collateral to secure the loan.
Buyers may also need to explore alternative financing options, such as equipment financing or accounts receivable financing, to secure the necessary funds for the acquisition.
Obtaining a Favorable Interest Rate
Interest rates play a critical role in determining the cost of borrowing. However, the interest rate offered to borrowers is dependent on several factors, such as credit history, collateral, and the financial health of the business being acquired.
To secure a favorable interest rate, borrowers need to have a good credit score and a strong financial track record. Buyers should also compare interest rates and terms offered by multiple lenders to find the best deal.
Acquiring a small business acquisition loan can be a challenging process, but it is not impossible. Buyers need to understand the challenges they may face and be prepared to provide lenders with the information and collateral they need to secure funding.