Non-SBA Business Acquisition Loans: Alternatives to SBA Loans for Buying a Business
As you seek financing options for a business acquisition, it’s important to consider all types of loans. Small Business Administration (SBA) loans are often touted for greater flexibility and accessibility, but they don’t always meet the diverse needs of entrepreneurs. Take the time to review alternative types of financing and learn about their distinct advantages, especially for businesses with different financial profiles, credit histories, and acquisition strategies.
By understanding the range of non-SBA business acquisition loans available, you can make an informed decision on how to secure a small business loan that’ll enable you to pursue your acquisition goals.
Why Consider Alternatives to SBA Loans
Entrepreneurs often turn to Small Business Administration (SBA) loans for funding for their ventures; however, there are many obstacles that make the process challenging. Rather than navigate the process, its risks, and complexities, business owners are often quick to explore alternative financing options for acquisition financing. Barriers to easily securing an SBA loan include:
- Lengthy approval processes
- Strict eligibility criteria
- Collateral requirements
- Limited loan amounts
- Barriers for startups
- Bureaucratic hurdles
- Preference to avoid personal guarantees
Pros of SBA Loans
- Competitive Interest Rates: SBA loans typically offer lower interest rates, reducing borrowing expenses for entrepreneurs.
- Extended Repayment Terms: Businesses benefit from longer repayment periods, easing financial strain and allowing for manageable monthly payments in installments.
- Tailored for Small Businesses: SBA loans are tailored to support small businesses, helping entrepreneurs who may struggle to get business financing from conventional lenders.
- Generous Loan Limits: Higher business loan limits can accommodate larger business capital needs and support necessary cash flow.
- Lender Guarantees: The loan program guarantees a portion of the loan, providing added security and increasing approval chances for businesses with limited credit or collateral.
Cons of SBA Loans
- Prolonged Application Process: The process can be time-consuming due to rigorous review procedures and due diligence by the SBA lender. This may be a setback for businesses that aren’t prepared for unpredictable delays.
- Rigorous Eligibility Standards: Entrepreneurs must meet strict qualification criteria, such as having a high credit score, a strong business plan, and substantial assets.
- Asset Collateralization: Startups or businesses with limited assets may not have the necessary collateral to meet qualifications.
- Additional Fees: These term loans may involve extra fees and closing costs, increasing the overall cost of borrowing for businesses.
- Administrative Complexities: Navigating the bureaucratic intricacies of SBA loan applications can be daunting. It may deter some entrepreneurs from pursuing this financing option.
Alternative Funding Options
Traditional/Commercial Bank Loan
Traditional lenders, including credit unions, offer competitive interest rates and flexible repayment terms, making them appealing for businesses with strong business credit and collateral. However, securing these loans can be a lengthy and complex process if you’re a new business. Additionally, traditional financial institutions may require a high down payment and have high fees and closing costs (including underwriting) that increase the overall cost of borrowing.
Seller Financing
Seller financing reduces the buyer's upfront capital requirements and fosters goodwill between parties, but it relies on the buyer's ability to generate cash flow from the acquired business. Negotiating loan terms and interest rates can be complex, especially if it involves real estate. It requires careful consideration of both parties' financial short-term and long-term goals and interests.
Earnout
Earnouts bridge valuation gaps and incentivize sellers to achieve agreed-upon performance targets post-acquisition. However, they introduce uncertainty and complexity, as the loan terms can state that future payments depend on the business meeting predetermined metrics. Disputes may arise over performance calculations or changes in market conditions, potentially straining buyer-seller relationships.
Crowdfunding/Peer-to-Peer
Crowdfunding and peer-to-peer lending platforms offer accessible financing options for startups and small businesses, but success isn’t guaranteed. These platforms can streamline application processes and lower barriers to entry; however, some platforms may charge fees or impose specific criteria, limiting accessibility for certain entrepreneurs.
Mezzanine Financing
Mezzanine financing provides businesses with subordinated debt or equity capital, offering flexible terms and higher funding amounts. However, it involves higher interest rates and may require equity warrants or profit-sharing arrangements, increasing the cost of capital. Default risks are higher, as mezzanine lenders have priority claims on assets in case of bankruptcy.
Rollover for Business Startups (ROBS)
ROBS allows entrepreneurs to use retirement funds to start or acquire existing businesses without incurring penalties or taxes. However, transactions require careful structuring and compliance with IRS regulations. Entrepreneurs risk losing retirement savings if the business fails, and liquidity may be affected if performance is subpar.
Private Equity
Private equity firms provide substantial capital injections and strategic support, but often require an entrepreneur to relinquish ownership and control. Negotiating loan terms and exit strategies can be complex, and entrepreneurs may face added pressure to achieve aggressive growth targets.
Equipment or Inventory Financing
Equipment or inventory financing allows businesses to acquire assets without tying up working capital, but may involve higher interest rates. Default risks are higher, as lenders may repossess assets in case of non-payment, impacting business operations.
Business Lines of Credit
Business lines of credit offer flexible access to capital, but variable interest rates and periodic renewals are unappealing to some entrepreneurs. Overutilization or non-payment can damage your credit score and jeopardize future loan options.
Grants
Grants provide non-repayable funding for specific projects or initiatives, but involve restrictive eligibility criteria and competitive application processes. While they are a great option for many businesses, these funds may come with usage restrictions, making them less flexible. They may also have reporting requirements, adding unwanted administrative work for recipients.
When securing financing for a business acquisition, there are many types of funding options to consider. If a Small Business Administration (SBA) loan isn’t the right financing option for your purchase, explore a variety of non-SBA acquisition loans to buy a business. Take the first step towards your entrepreneurial journey by actively searching businesses for sale and exploring your financing options.