Yesterday we discussed Family Members  as a possible source for acquiring a business acquistion loan. Today we discuss two additional sources.

Banks

Thinking about a business loan? A bank automatically comes to mind as a good source. Unfortunately, most banks resist making business acquisition loans. Strange but true; especially because after starting a business, the banks actually seek your business! So why do banks avoid making business acquisition loans?

Banks may advertise business loans, but they usually mean for existing businesses. Unless you have a strong business plan, an even stronger former relationship with the bank and good collateral, count on hearing many reasons for declining your loan application to purchase a business. Your best banking source comes from those banks participating in the SBA loan program if they qualify you for an SBA guaranteed loan (see SBA as another source below).

Just because a bank turns down a business acquisition loan application, it doesn’t mean that you and your business plan aren’t viable. Banks practice risk aversion and turn down many new business purchase requests. When you finally secure a business acquisition loan, choke back the giggle when the same bank who denied your loan comes calling for your business. Consider handing them an application and telling them you will get back to them after they furnish documentation and you take it before the bank committee.

SBA (Small Business Administration)

The SBA offers business acquisition loans through approved lenders. Usually the SBA only guarantees loans made by financial institutions rather than directly making loans. This SBA guarantee program is called the SBA7(a) program.

Your local SBA office furnishes a list of approved lenders. The list includes both banks and other types of financial institutions such as GE Small Business Lending, AT&T Finance, CIT Group and others. In some cases the financial institutions provide for a starting working capital along with the actual price for acquiring the business. Expect a required down payment of approximately 15% to 25% of the loan amount; and plan on additional up-front fees for an appraisal and other costs. SBA approved lenders should be offering market competitive interest rates.

The downside of an SBA guaranteed loan includes piles of documentation and lots of detail along with a generous helping of patience. You benefit by providing all the required documentation in a quick and efficient manner. The sooner the completed package arrives at the SBA underwriter’s desk, the sooner you can expect an answer and start your new business. While waiting raises the frustration level, successfully obtaining a loan makes the outcome with the SBA a positive experience.

In Part III we discuss two more possible business aquisition loan sources.