It can be difficult to qualify for small business acquisition loans. If the business is highly profitable, the sale price will likely reflect significant goodwill that can be difficult to finance. Lenders can be hard to find if the business isn’t making money. This applies even if the underlying assets are worth significantly more than the purchase price. The terms of business acquisition loans or change-of-control financing can vary greatly from one case to the next.
Here are some of the main challenges that you will face in order to obtain a loan for small business acquisition.
Goodwill is defined as the difference between the sale price and the resale value or liquidation value business assets, after all debts are paid. It is the expected future profit that the business will generate beyond the current assets’ value. Lenders are not interested in financing goodwill. This effectively raises the down payment needed to close the sale or acquire financing from the vendor through a vendor loan.
Vendor support is a common element in the sale or purchase of a small business. You might ask the vendor to provide support and financing if they aren’t in the original conditions of sale. Asking the question is a worthwhile exercise for many reasons. To ensure that the seller receives the highest possible sale price, and to preserve some goodwill, the vendor will finance a portion of the sale by allowing buyers to pay a percentage of the sale price over a time frame within a schedule.
To ensure seamless transition, the vendor may offer transition assistance for a certain period. Vendor support combined with financing creates a positive vested interests that will allow the vendor to assist the buyer in successfully transferring all aspects of ownership and operations. Failure to comply could lead to the vendor not receiving all proceeds from the sale in the future, in the unlikely event that the business is to fail or suffer under new ownership.
Potential lenders find this attractive because it reduces the risk of losing their loan. This directly speaks to the next financing problem.
Business Transition Risk
Is the new owner able to manage the business as well the former owner? Customers will continue to do business with the new owners? Was the previous owner able to duplicate or replace a certain skill? What will happen to the company’s key employees after the sale? Lenders must have confidence that the business will continue to perform at the same level as the present. A buffer is usually needed in financial projections to allow for possible changeover lags.
Many buyers will also purchase businesses because they see substantial growth and believe they can benefit from it. It is important to convince the lender that you have the potential for growth and are capable of achieving superior results.
Asset sale versus share sale
Many sellers wish to sell their shares for tax purposes. If the agreement does not specify otherwise, all future and possible liability relating to the going concern business will pass to the buyer. Potential business liability can be difficult to assess, so there is an increased risk in small business acquisition loans related to share purchases.
Are you in a mature or growing market? How does the company fit in the market’s competitive dynamics? Will a change of control increase or decrease its competitive position and/or weaken it? Lenders must be certain that the business will succeed for at least the term of the loan. This is crucial for two reasons. A steady cash flow will allow for a smoother repayment process. A strong business that is a going concern has a greater chance of being resold.
The lender will be confident that the business can still make enough money from resale to pay off the outstanding debt if the owner is unable to continue the business due to an unforeseeable event. Lenders and investors are more comfortable assessing local markets than businesses selling to a wider geographic area. Local lenders might also have some knowledge about the business and its prominence in the local marketplace.
Net worth of an individual
Business acquisition loans typically require that the buyer can invest at least one third of the purchase price in cash, with a tangible net worth equal to or less than the remaining loan amount. Statistics show that companies with excessive debt are more likely to default on business acquisition loans and suffer financial hardship. The higher the loan amount required for business acquisition, the greater the chance of default.
Do you need capital for your small business? Here are the facts about unsecured loans
You will be happy to learn that you can get money for your small business through an unsecured loan. Lenders understand your frustrations with trying to borrow money today’s economic climate. You’ve heard it before: Money is what makes money. It’s simple, think about it. You need money to expand your business, whether you want to buy more inventory or purchase new equipment.
There are many places that you can get business loans without collateral. Pre-qualification for a loan can be granted to those who have been running a business for more than a year and make at least $3,000 per month in credit card sales. These requirements may be very difficult to meet or exceed. Every credit situation is different. Pre-qualification gives clients a greater chance of getting funding. Lenders will make every effort to help you get a loan. There is no obligation or fee until you have secured funds.
You may be eligible to borrow $10,000-$150,000 if you are a start-up or individual. You may be eligible to borrow between $15,000-250,000. If you’re a business owner who has been in business for at least two years, you might be eligible to borrow between $10,000 and $150,000. Based on a variety of credit attributes, the amount you can borrow will vary. There is no need for collateral or assets. Your credit score and credit card sales history will determine the amount of your business loans. It’s as simple as that!
Lenders typically require a minimum of $5,000 to get a loan. Loan amounts are typically twice your monthly debit and credit card sales. Lenders process loan applications within seven business days. You’ll get your money as soon as you submit the short application online, by phone or via fax. Most cases, you don’t need to provide any financial documentation. All types of businesses can apply for these loans. Most loans have a term of one year. It is common to get loans for 24- to 84 months.
These business loans are free to apply for. However, once the loan has been approved, there will be a processing fee. Some lenders may charge a “loan consulting fee”, which varies depending on the amount of financing that you receive and the type or program that you select. All fees are established before the loan is closed. There are many loan programs that do not charge fees, so you might want to look at some lenders.
These business loans have different interest rates depending on your credit score and the lender who approves you. The average interest rate is between prime +2% to prime +9.99%. For most clients, the average interest rate can be anywhere from 6.99% to 13.99%. The terms of loans and interest rates are often clearly disclosed at the time you apply.
These business loans are easy to repay. The lender will automatically withhold small amounts of your daily credit card settlements to ensure that the loan is paid off. There are no checks to be written and no due dates. The national processor will process your merchant account processing at rates that are often lower than your current processing rates. Your lender will receive their payment every day, in short.
Stop the stupid stuff in your business
We live in an age of change. Shift is happening! Many American businesses are facing difficulties due to international competition. There are many decisions that go against both good business sense as well as customer loyalty. Marketing is often a process of finding ways to make potential or current customers spend more money with an organization. Instead of worrying about what to do next, I suggest that you stop thinking about it. Also, you should stop doing stupid stuff.
It is important to not do stupid things. This means that you must find out what stops customers spending money with your company and make sure that it never happens again. Here’s an example I call “stupid stuff”. Customers who wish to speak with a live agent may be charged by some airlines. This is stupid stuff in two ways. Customers who wish to keep getting the same one-on-one attention they have always received are being penalized. Worse, they have made it worse by stating that they will charge more for the same service. What number of customers will this cause to lose? I can think of at least one.
Businesses need to stop doing stupider, but more subtle things. For example, take the new Wheaties boxes. General Mills has recently introduced Wheaties boxes featuring photos of U.S. Olympic gold-medalists. Paul Hamm was the missing one. Why?
General Mills responded to my inquiry with this:
“Selecting the Wheaties Champion was never an easy task, especially after witnessing so many exceptional performances by so many champion athletes. It is impossible to honor all champions on the Wheaties box.”
They leave out the first American man to win the Olympics all around gymnastics championship. Nearly universal praise was given to his miraculous recovery from a catastrophic fall and near-perfect high bar routine, which, for many, is what defined “champion” in the sport’s history. There was also controversy. A South Korean gymnast claimed that he was penalized for a scoring error, and appealed to Court of Arbitration for Sport. Recently, the court ruled Hamm can keep his gold medal.
The medal was not awarded to Hamm, even though it was disputed. General Mills chose to do the “safety” thing. Wheaties’ safe approach to Hamm is causing a lot of customer dissatisfaction and resulting in millions of customers seeing him as a hero. That’s stupid stuff. Start shopping! Instead of saying “No”, start using “Yes”! Stop charging for services most people believe are free. Stop causing frustration, embarrassment, inconvenience, or confusion among your customers.