BusinessHABBasic Loan Acquisition Tips:Whether you’re a first-time applicant or a seasoned vet.
The prospect of applying for a loan can be daunting.
However, adequate preparation can make the process a far easier one.
In this article, we discuss the process of getting a loan to acquire a business.
This article covers the basics of a business acquisition loan.
What you need to have in place before you apply for a loan and how to get the process started.
Here are suggestions for things to do before you visit the bank or apply for a loan:
Before you start looking for businesses
If you are serious about purchasing a business.
You need to do a few things before you start the process.
Obviously, you are reading this article because you plan to use financing.
To improve your chances of getting that financing, consider the following:
1. Basic Loan Acquisition Tips:Get SBA-backed up
Most commercial banks are reluctant to offer loans to people.
Who want to buy a business unless the loan is guaranteed by the Small Business Administration (SBA).
Because the SBA provides very solid guarantees, banks can reduce their risk and receive an incentive to make otherwise “risky” loans.
However, the SBA guarantee is considered a last resort as far as collections are concerned.
Banks have to ensure that the loan can be paid by the business or the borrower.
Banks are the first line of collections.
The bank can collect on the SBA guarantee only if it’s not able to recover funds from the business or the owners’ personal assets.
As a result, you need to be ready for the bank’s underwriting process.
This preparation gives you the highest chance of getting the funding you need.
Lastly, don’t worry if your situation isn’t “perfect”.
The SBA is in the business of helping entrepreneurs who couldn’t get a loan otherwise.
2. Check your personal credit and the credit of all your potential partners.
Ideally, your credit scores should be at least 650.
Obviously, higher credit scores are better.
Lending institutions, including SBA-backed providers.
Use your credit as a proxy for financial responsibility.
We know it is not always accurate (nor is it necessarily fair), but this is how they do it.
3. Determine your net worth – personal assets and personal liabilities
Lending institutions need to know the net worth of you and your partners.
You need to show the lender your personal assets such stocks, savings, home equity, retirement savings, and such.
Additionally, you need to show the lender your liabilities, such as your mortgage, car loans, and personal loans.
4. Gather the last three years of tax returns
The bank will also ask you and your partners (those with 20% or more ownership share)
To provide your complete tax returns for the last three years.
Since you don’t want your loan to be delayed, get your tax returns ahead of time.
If you don’t have them, speak with a tax professional.
5. Start raising funds for the down payment
In most traditional SBA-guaranteed loans, the borrower is expected to provide 20% of the acquisition cost as a down payment.
This number can be reduced to 10% if you are also using seller financing and if the seller is willing to provide a two-year standstill.
This discussion often brings up the issue of so-called “no-money-down loans.”
For all intents and purposes, these loans don’t exist.
There are some very specific situations that can require minimal money down.
Such as some very asset-rich leveraged buyouts.
However, most transactions require a 10% to 20% down payment.
It’s best that you be prepared to pay this.
6. Letter of Intent (LOI)
The most important thing you need before you can start seriously looking for financing is a signed Letter of Intent (LOI) from the seller.
While you should certainly speak to some lenders before you get the letter, no one will give you a proposal unless you have the signed LOI.
7. Select the provider you will work with
You are to select the lending provider to work with.
A number of providers offer SBA-guaranteed loans.
While their requirements are similar.
They also have differences.
Select the loan that works for you and that you are comfortable with.
8: Provide a full application
The next step is to provide a full application.
This step can be relatively easy, or extremely hard, depending on how prepared you are.
Ideally, you should have your personal financial reports.
The financial reports of the business, your taxes, and other necessary reports ahead of time.
Getting this information ahead of time saves you a lot of headaches and helps ensure you meet the deadlines defined in your letter of intent.
You can find more detailed information on business acquisition loan requirements.
9: Go through the underwriting process
The next step is for the lending institution to start its underwriting process.
The length and depth of this process depend on the type of business that you are acquiring.
The lender evaluates the assets and liabilities of you and any partners you may have.
The lender considers your business experience and examines the financial records of the business.
Finally, the lender orders an appraisal of all relevant assets and performs a thorough vetting of all important issues.
If all goes well, your loan is approved and you are ready to move to the last step.
10:Basic Loan Acquisition Tips :Funding
Another step is funding the loan.
In this step, the lender’s appointed escrow agent distributes funds, assets.
And stock according to the agreements you have with the seller.
An Asset Purchase Agreement or a Stock Purchase Agreement.
11. Loan Acquisition :DEFINE YOUR REASONING
Why does your business need a loan?
It may seem like a simple enough question.
But knowing how to respond concisely is the most important part of applying for a loan.
Lenders will want to know exactly why you are looking to borrow money.
How much you will need, and how the loan will impact your business.
Loans for “general improvements” aren’t going to be approved.
Your lender wants to see that you’ve spent time carefully thinking about what aspect of your business you’d like to invest in.
And how that investment is going to pay off.
In general, loans for improvements that are tangible, retain their value.
And that could be repossessed if necessary are the most likely to be approved.
While loans for debt consolidation, salary, or the purchase of a non-essential asset are likely to be denied.
12. Loan Acquisition :CALCULATE COSTS
While focusing on the long-term benefits of your loan may be tempting.
Don’t overlook the daily, weekly, or monthly payments you’ll be expected to make.
You want to find a loan that will both give you access to the funds you need and that you will realistically be able to pay off.
A business that has #300K per year in total sales simply is not going to be approved for a million naira loan (without serious collateral, that is).
Remember that any financial benefits your business may see as a result of the loan will take time to show up, so it’s important to find a loan with payments that you can afford right now.
13. DO YOUR RESEARCH
Don’t just go with the large bank down the road because you assume they will have the best deals.
There are many factors that are involved in the true cost of a loan.
Interest rates, length of loan, monthly payments, etc.
And it’s important to calculate these costs for every lender.
Don’t forget about merchant cash advance companies.
Micro-lenders, credit unions, peer-to-peer networks.
And commercial lenders as options beyond the bank that may be better suited for your needs.
And talk to fellow entrepreneurs in your area about their experiences.
Whatever you do, don’t apply to a bunch of companies all at once.
Inquiries do show up on your credit report.
And lots of inquiries over a short period of time will indicate desperation to potential lenders and may even negatively affect your score.
14. CHECK YOUR BUSINESS LICENSES
Verify that you are up-to-date on all of your state, local, and other required business licenses.
Every lender you speak with will check these before funding you.
And you don’t want to be caught neglecting to take care of simple responsibilities for your business.
15. KEEP YOUR PARTNERS INFORMED
If you don’t personally own over 75% of your business.
You will need to involve your partners in the application process.
Be sure that everyone is on the same page about the need for a loan and the amount.
Your lender will want all of the business owners involved.
And your partners should be prepared to submit additional personal documentation if necessary.
16. KNOW YOUR SCORES
Expect lenders to check both your business’ credit score and your own.
It’s very hard to improve a low score.
But you can always do some cleaning up before you apply.
There are occasionally errors in credit reports.
And you’ll want to catch these long before you begin the application process.
To give the reporting agencies time to fix your score.
17. HAVE A BUSINESS PLAN
Business plans are often the first thing lenders look at when considering your application.
A poorly put-together business plan may be the last thing they look at too.
It’s incredibly important to make a good first impression with your potential lender.
And you want to come across as competent and knowledgeable about your business.
Your lender will take you far more seriously if you show up with your business plan in hand.
Good business plans will be extensive and will require lots of work.
But taking the time to carefully develop your plan could easily be the difference between your application being quickly discarded or followed-up on.
Read also: How to Get a Business Loan without Collateral in Nigeria.
18. MAKE SURE YOUR LOCATION IS CORRECT ONLINE
Do you own a new building, or have you recently changed location?
Double-check that your new address is on your Yelp page and website.
Your lender will probably run a quick Internet search on your reported location.
And you don’t want them dismissing your application as fraudulent because according to Google Maps, your address is still an abandoned lot.
19. UNDERSTAND YOUR COLLATERAL
Many—although not all—lenders will require some form of collateral before agreeing to lend to you.
While there are many things you could list as collateral.
Lenders generally prefer tangible options such as property or equipment that could be sold if necessary.
If you choose to go with a loan that does require collateral, go through the appraisal process beforehand to get an accurate idea of the worth of your options.
Your lender will want to see some type of recent documentation.
Specifying that the item or items you are using as collateral is actually worth what you say it is.
Don’t forget that this is something you could be giving up if you don’t pay your loan off; do the potential benefits outweigh the certain risks?
See also: How to Get Federal Government Loans for Small Business in Nigeria
20. FIND DOCUMENTATION TO VERIFY YOUR BUSINESS’ HISTORY
Your lender will want to see current bank statements, credit card statements, and tax returns and may.
Also require additional documentation to verify that your business has been operating in the way that you say it has.
Collect this information before you apply.
Your lender will expect you to be adequately prepared by the time you are applying for your loan, and it will reflect poorly on you if you aren’t.
Related:Tips to Apply for Conventional Business Loan in Nigeria
21. APPLY AHEAD OF TIME
Perhaps one of the worst things you can do when applying for a loan is wait until the last minute.
Ideally, you should apply for a loan long before you need the money.
The more urgent your need for funds, the more desperate you’ll come across to your lenders.
And the less likely you are to be approved for the loan.
It’s always easier to get hold of the funds you need if you apply long before you actually need them.
Conclusion:
The basic idea behind acquisition loans is that the acquirer purchases the target with a loan collateralize by the target’s own assets.
In hostile takeover situations, the use of the target’s assets to secure credit for the acquirer is one reason that the tactic has a predatory reputation.
To obtain an loan, the acquirer must therefore first make sure the target’s assets are adequate collateral for the loan needed to purchase the target.
The acquirer must also create and study financial forecasts of the combined entities to make sure they generate enough cash to make the principal and interest payments.
In some cases, maintaining optimal cash flow could be a real challenge if the target’s management team leaves after the acquisition.
In some cases, an acquisition loan can come directly from one or more banks.
Sometimes acquirers issue bonds in the open market.
Obtaining loans is often expensive and complicated, and when a particular deal is especially large.
There is often more than one acquirer, which allows for sharing of the risks and expenses (and rewards).
An investment bank, a law firm and third-party accountants are often necessary to correctly structure the loan and the transaction.
BusinessHAB