What It Is and How To Qualify

If you’re looking to buy a small business, here’s the good news: You don’t need to be a massive corporation to do it. The catch? You may still need access to a significant amount of capital.

While some business purchases can be made without paying entirely out of pocket (think seller financing or crowdfunding), those deals can take a ton of time and negotiation. If you want a more straightforward path to funding, a business acquisition loan is worth considering.

A business acquisition loan is simply a loan that’s used to purchase a company, including owning a franchise or buying out a business partner. Similar to a personal loan, business acquisition loans get repaid in fixed, equal monthly increments over an agreed upon period of time (plus interest).

The advantage here is that you don’t need to risk your own cash to purchase a business. You will, however, need to budget for repayments, while also supporting the cost of operations for your newly acquired business.

You can use the loan to acquire a business whether you’re an investor, a small or large business yourself or just an individual who wants to buy a company that’s already up and running instead of starting your own from scratch.

You can get a business acquisition loan through programs backed by the Small Business Administration (SBA), as well as through banks, credit unions and online lenders.

Generally, repayment terms can be as short as three years or as long as 10 years, with SBA-backed business acquisition loans carrying terms as long as 25 years. You’ll also typically be expected to make a down payment of at least 10% of the purchase price, sometimes even upwards of 30%.

Aside from that, you’ll want to apply with a good credit score (the exact credit score requirement can depend on the lender), and some lenders may require personal collateral to secure the loan.

You can actually use an SBA 7(a) loan to acquire a business. It’s backed by the government so lenders are usually able to offer more favorable terms on the loan. However, requirements for an SBA 7(a) loan can be pretty strict: You’ll need a credit score of 680 or higher, no bankruptcies in the last three years, a down payment of at least 10%, no current federal debt, plus managerial experience (or experience in the industry in which you’re acquiring the business). You may also be required to put up some collateral to secure the loan.

Fora Financial is another small business lender offering term loans for a wide variety of needs, including business expansion, equipment purchases and more. The maximum loan amount offered by Fora is quite high at $1.5 million, but loan terms only go up to 18 months.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every small business article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of small business products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.