5 Essential Steps to Secure Business Acquisition Funding

Securing funding for a business acquisition can be a challenge, but with the right steps, it’s achievable. Here’s a quick roadmap to get started:

1. Review Your Finances: Check your credit score (680+ is ideal), debt-to-income ratio (below 43%), and ensure you have enough cash reserves (20-30% of the purchase price). Don’t forget to plan for extra costs like transaction fees (5-10%) and working capital (around 15% of the purchase price).
2. Compare Funding Options: Explore bank loans, SBA loans, and seller financing. For example, SBA loans often require lower down payments (10-20%) and offer longer repayment terms (up to 25 years).
3. Prepare a Strong Loan Application: Gather key documents like business plans, financial records, and purchase agreements. Tools like QuickBooks and LivePlan can help organize everything.
4. Combine Funding Sources: Use a mix of SBA loans, seller financing, and buyer equity to spread risk and meet funding needs. For instance, a $1M purchase might include 70% SBA financing, 20% seller financing, and 10% equity.
5. Leverage Digital Tools: Platforms like Clearly Acquired simplify the process by connecting you to lenders, managing documents, and tracking progress.

Quick Comparison of Funding Options

Funding Type	Interest Rates	Down Payment	Term Length	Approval Time
Bank Loans	5-10%	20-30%	3-7 years	2-4 weeks
SBA Loans	8-10%	10-20%	Up to 25 years	60-90 days
Seller Financing	6-10%	Negotiable	5-7 years	Varies

How to Fund Your Business Acquisition: Tips From SBA Loans to Family Loans

Step 1: Check Your Financial Status

Before diving into acquisition funding, take a close look at your financial situation. This step helps you build a solid foundation for comparing funding options later.

Review Your Finances and Credit

Start by reviewing your credit score. A score of 680 or higher is ideal ^[1]. Also, aim to keep your debt-to-income ratio below 43% ^[3].

Lenders focus on these financial metrics:

Financial Metric	Target Range	Why It Matters
Credit Score	680+	Impacts interest rates and eligibility
Debt-to-Income Ratio	Below 43%	Determines borrowing capacity
Cash Reserves	20-30% of purchase price	Shows your ability to cover down payments
DSCR	Greater than 1.25	Reflects ability to handle loan payments

Estimate Future Costs

Acquiring a business involves more than just the purchase price. Be prepared for additional expenses:

• Transaction Costs: These typically range from 5-10% of the purchase price and cover legal, accounting, due diligence, and broker fees ^[7].
• Integration Costs: Set aside 1-7% of the deal value for IT updates, staff training, rebranding, and equipment upgrades ^[7].
• Working Capital: Ensure you have enough working capital to keep operations running smoothly. For example, in 2023, Smith Manufacturing allocated about 15% of the purchase price for this purpose ^[6].

Planning ahead ensures you're financially ready for the acquisition process.

Step 2: Compare Funding Sources

Once you've evaluated your financial situation, it's time to explore the funding options available for purchasing a business. Each option comes with its own set of requirements and perks, which can shape your overall strategy. Comparing these options will help you figure out which one aligns best with your goals.

Bank Loans vs. SBA Loans vs. Seller Financing

Bank loans typically come with interest rates ranging from 5-10%. However, they often require strong collateral and a solid credit score - usually a minimum of 680. Additionally, you’ll need a down payment of 20-30% to qualify^[6].

SBA loans, particularly the 7(a) program, offer more lenient terms. These government-backed loans can fund up to $5 million and require a smaller down payment, usually between 10-20%. While the approval process can take anywhere from 60 to 90 days, the extended repayment terms (up to 25 years for loans involving real estate) can make monthly payments easier to handle^[2].

Seller financing is another option, often covering 30-60% of the purchase price^[6]. Unlike traditional loans, the terms are negotiated directly with the seller, giving you more flexibility to structure the deal in a way that works for both parties.

Funding Options Comparison

A growing trend in the market is the use of a "capital stack" approach, which involves blending multiple funding sources to finance a business acquisition^[5]. Here's a breakdown of the main funding options:

Feature	Bank Loans	SBA Loans	Seller Financing
Interest Rates	5-10%	8-10%	6-10%
Down Payment	20-30%	10-20%	Negotiable
Maximum Term	3-7 years	25 years	5-7 years
Approval Time	2-4 weeks	60-90 days	Varies
Credit Score	680+	650+	Flexible
Collateral	Significant	Business	Business assets

For example, in a $2 million acquisition, you could use 60% SBA financing ($1.2 million), 30% seller financing ($600,000), and 10% buyer equity ($200,000)^[5].

Another option to consider is asset-based lending, which allows you to leverage the business’s assets as collateral for financing^[5].

Step 3: Build Your Loan Application

Creating a well-prepared loan application is key to securing funding for your acquisition. This step connects your financial review with lender comparisons, showcasing your readiness and reliability.

Required Loan Documents

Your loan application should include documents that highlight your creditworthiness and the feasibility of the acquisition. Here's what you'll need:

Document Type	Purpose	Requirements
Business Plan	Strategic Overview	3-5 year projections, market analysis, growth strategy
Financial Records	Proof of Performance	Last 3 years of tax returns and financial statements
Purchase Documentation	Deal Structure	Letter of intent, purchase agreement, business valuation
Personal Documents	Borrower Credentials	Resume, personal financial statement, credit report
Collateral Information	Security Details	Asset list, real estate documentation, equipment valuations

Store these files securely using cloud platforms so lenders can access them easily and safely.

SBA Loan Guidelines

If you're considering an SBA loan for your business acquisition, keep in mind that these loans have specific criteria. Under the SBA 7(a) program, you'll need to meet the following:

• Down Payment Requirements:

  • At least 10% of the total project cost must come from your personal funds.
  • Seller financing can count as part of the down payment if it remains on full standby for two years.
  • In certain partner buyouts, 100% financing might be available^[2].

• Financial Benchmarks:

  • A debt service coverage ratio of 1.25 or higher.
  • A personal credit score of at least 680.
  • The business must show enough cash flow to handle loan payments^[5].

To strengthen your application, use tools like LivePlan for professional business plans and QuickBooks for organized financial records. A professional valuation can also enhance your credibility with lenders.

SBA loans typically take 60–90 days for approval, so start gathering your documents early. Provide a detailed breakdown of how you'll use the funds, backed by cash flow projections that demonstrate your ability to manage loan payments while keeping the business running smoothly^[2].

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Step 4: Mix Funding Methods

After preparing a strong loan application and comparing funding options, combining different funding sources can make acquiring a business more manageable while spreading out the risk. Many acquisition strategies now blend traditional loans with flexible payment arrangements to create a structure that satisfies both buyers and sellers.

Combined Funding Plans

Here’s an example of how a $1 million acquisition might be financed:

Funding Source	Amount	Percentage
SBA Loan	$700,000	70%
Seller Financing	$200,000	20%
Buyer Equity	$100,000	10%

On top of these primary components, earnout provisions can be added to bridge valuation gaps. These provisions allow for extra payments - up to 20% of the purchase price - if certain performance goals are met.

This mix of funding can also support a structured payment plan.

Sample Payment Structure

Here’s how payments could be scheduled:

• Initial Payment Phase
  The buyer provides a down payment of around 10% and secures an SBA loan for about 70% of the total price. This approach gives the seller immediate reassurance while keeping the buyer’s working capital intact.

• Seller Financing Component
  The remaining 20% is covered through seller financing. In the first year, payments might be interest-only to ease initial cash flow pressures. Over time, as the business stabilizes, payments can increase to start reducing the principal.

• Performance-Based Adjustments
  To align both parties' interests, earnout provisions can be included. These link additional payments to measurable goals, such as meeting specific KPIs. For example, the seller could receive up to 20% of the purchase price over three years if those targets are achieved^[5].

Digital tools can help manage this type of funding plan. Platforms like DealRoom or Devensoft are great for keeping track of multiple funding sources, payment deadlines, and schedules^[8].

Step 5: Use Digital Tools

After combining funding methods, digital tools can simplify the rest of the process. Modern acquisition platforms have changed how buyers secure and manage funding, offering features like lender connections, organized documentation, and real-time payment tracking.

Online Platform Features

Acquisition platforms today provide tools that make funding easier to handle. For instance, Clearly Acquired offers an all-in-one system to manage the funding process, including:

Feature	Function	Benefit
Lender Matching	Connects buyers with SBA-approved lenders	Simplifies finding the right lender
Document Center	Centralizes financial statements and applications	Speeds up due diligence
Deal Room	Secure space for communication and file sharing	Protects sensitive information
Progress Tracking	Real-time updates on loan status	Keeps everyone on the same page

With automated systems, platforms like these can cut the typical 3–6 month SBA loan process down to just 30–45 days ^[2].

These features show how modern tools go beyond what traditional systems offer.

Platform Comparison

When selecting an acquisition funding platform, it's important to weigh the differences between traditional and modern options:

Feature	Traditional Platforms	Modern Deal Platforms
Funding Options	Limited to standard loans	Includes SBA loans, seller financing, and PE
Deal Management	Basic document storage	Advanced tools with built-in analytics
Security	Standard encryption	Improved safety with virtual data rooms
Support	Email/phone only	24/7 access with real-time updates
Integration	Standalone systems	Connected to accounting and legal services

Virtual data rooms (VDRs), now essential for secure deal management, are projected to grow into a $3.2 billion market by 2026 ^[4].

Look for platforms that provide:

• Direct integration with SBA lenders
• Automated document checks
• Real-time updates on progress
• Secure communication tools
• Support for post-funding activities

These tools not only speed up the process but also reduce mistakes and improve clarity throughout the acquisition process.

Conclusion

Securing funding for a business acquisition requires careful preparation and a clear understanding of your options. With over 12 million businesses projected to change ownership in the next 10-15 years ^[2], knowing how to navigate the funding process is essential.

The SBA 7(a) loan program is a standout option, offering up to $5 million in financing and repayment terms extending up to 25 years for purchases involving real estate ^[2]. With down payment requirements as low as 0-10%, it’s often more accessible than traditional loans ^[1].

Today’s acquisition funding often relies on a mix of strategies. The capital stack approach allows buyers to combine different funding sources, balancing cost, risk, and control ^[6]. This flexibility helps create funding solutions tailored to individual needs and objectives.

Digital tools also play a key role in simplifying the process, from evaluating opportunities and managing documentation to connecting with lenders and overseeing the deal. Incorporating these tools into your strategy can make the entire process more efficient.

If you’re ready to move forward with an acquisition, here’s how to get started:

• Assess your financial position and estimate the total cost of the acquisition.
• Look into SBA loan options, including their specific terms and requirements.
• Develop a funding plan that uses the capital stack approach to align with your goals.
• Use digital platforms to streamline deal management and documentation.

FAQs

Here are quick answers to some common questions about funding a business acquisition.

How can I finance the purchase of a small business?

There are several ways to finance a small business purchase. The SBA 7(a) loan program, for instance, offers up to $5 million with interest rates ranging from 8–10% for loans over $50,000 ^[1]. You can also explore options like traditional bank loans, credit unions, or online lenders.

Is it possible to get an SBA loan for acquiring a business?

Yes, the SBA 7(a) loan program is designed to support business acquisitions. It provides up to an 85% loan guarantee with repayment terms of up to 10 years for most deals, and up to 25 years if real estate is included ^[2]. To qualify, you'll need good credit and adequate collateral. The program covers various acquisition scenarios, such as full ownership changes, partner buyouts, or partial ownership transitions ^[2].

What are the options for funding a business purchase?

A mix of funding sources often works best. Combining an SBA loan or traditional bank financing with seller financing and performance-based earnouts can help balance risk and improve cash flow ^{[1] [2]}. For example, an SBA loan can serve as the main financing tool, while seller financing or earnouts provide additional flexibility for both parties.