How to Get a Business Acquisition Loan | Loan Underwriting

Underwriting is a process linked to the acquisition of business since we could consider it a form of financing for the initial stage, which has 2 variants:

  • Start a business from 0
  • Buy an existing business

In this article, we will discuss from what the underwriting process is, to the criteria that an underwriter has to determine the risk of approving your loan.

What is the underwriting process?

It is the process in which an applicant is evaluated to determine whether or not he is eligible to receive a loan. The person in charge of evaluating your loan application is called an underwriter, who, in addition to evaluating if you are eligible to receive the loan, values ​​other variants, such as the total amount and interest rates.

We must remember that a loan is issued by a financial institution (usually granted by a bank), so we are talking about a financial risk, which is the danger or possibility that shareholders, investors, or other financial institutions lose money.

There is a different underwriting process if you apply for a loan for your business or the acquisition of one since different evaluation criteria are used.

What Is Commercial Loan Underwriting?

This is the process for a loan applicant business, in which both your finances and the financial health of your business will be evaluated.

Among the evaluation criteria, we will find …

  • The monthly income of your business. Lenders want to be sure that you will be eligible to pay interest, so making sure your business has a monthly income of approximately $ 10,000 is a way to reduce financial risk.
  • Your personal credit history. For a lender, the fact that a person has a healthy credit history is proof that the person will be able to handle the debt.
  • The value of your collateral (Collaterals are belongings with monetary value, which you will put in guarantee in case you cannot pay the interest). Many lenders will evaluate that your collaterals are at least of the same value as the amount you are asking for.
  • Your capital.
  • Underwriters will consider whether you have alternative sources of payment, for example, personal or government guarantors.

What Is A Business Acquisition Loan?

If your interest is not to ask for a loan to invest in your business, but to acquire an existing business, you should know what Business Acquisition Loans are.

This is a loan that will allow you to buy an ongoing business, which is commonly used to acquire franchises, or also to acquire a thriving company/business with a solid financial history.

How Business Acquisition Loans Underwriting Work

The underwriting process for acquiring a business is slightly different than a commercial loan since your finances will be evaluated here, as well as the financial health of the business you want to acquire.

The above is to present the minimum financial risk for lenders and the financial institution.

You will need to present documentation that proves, at least, two to five years of stable or growing revenue and overall profitability.

If the financial health of the business you plan to buy is weak, you can balance the situation by guaranteeing your collateral.

Most lenders will not value the intangible value of the company, such as reputation, industrial secrets or goodwill, because the valuation of intangible assets requires a very complicated process and complex projection parameters.

Lenders prefer to issue loans for the acquisition of businesses that provide professional services, such as legal firms, accounting firms, medical and dental practices, veterinary centres, etc …

This is because lenders see a more risky investment establishments such as restaurants or gambling establishments.

Another aspect that will help you qualify in the underwriting process is that you have work experience in jobs related to the business you plan to acquire.

What are the personal financial requirements for a business acquisition loan?

  • Submit documentation proving 2 to 5 years of personal tax returns
  • Having a credit score of 680. Also, having a higher credit score will help you reduce interest payments.
  • If you will put collateral under guarantee, you will need to present the documentation that proves that you are the owner of said collateral
  • You may be asked about your personal history of bankruptcy or foreclosure.
  • For SBA loans you must be free of any outstanding payments with the U.S. government.

How is the loan evaluated for the acquisition of a business?

The first thing will be that the business you buy will provide the underwriter with all the financial information to necessary, as a balance sheet, clearly showing the assets of the company.

Another requirement is a cash flow statement, which demonstrates economic solvency and that the business lacks weakness in cash flow.

The company should not have delinquent on payments to lenders, suppliers, or employees.

What are the necessary documents?

  • Business Plan
  • Business Tax Return
  • Balance Sheet
  • Personal Tax Return
  • Bank Statement
  • Business Lease Agreement
  • Business Debt Schedule
  • Business License

Which Loans Are Best option for buying A Business?

Seller Financing

The business owner will lend the buyer 70% of the value of the purchase, so that the new owner subsequently pays the loan based on the future performance of the company, in addition to interest.

This is a fairly flexible form of loans, in addition to being fast and secure.

Term loans

It is the most common form of financing/loan, since it consists of sending your application to a bank for the underwriter to approve your application. However, due to the policies of each bank, you may have to submit your request several times, and the response time is usually long.

SBA 7A Loan

This is a loan issued by the government, in which it is guaranteed to ask for up to 5 million dollars. You need a personal credit score of 680, also, you should present evidence that you have had experience within the buying business industry.

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