Purchasing an existing business is a quicker way to become an entrepreneur. Moreover, it becomes even more lucrative to be an entrepreneur than to pursue a new start. In most businesses, the hardest thing to acquire to be a successful entrepreneur is funding. Many people applying for a loan have been shocked to get a rejection, even though the reason behind it is that they have made some common pitfalls that lead to rejection while acquiring a small business acquisition loan. The following are the five most prevalent red flags that could ruin your approval status and what you need to do to correct them before they are considered deal-breakers.
1. Weak Personal Credit Profile
A low score or several recent late payments, a high credit utilization, or having unresolved collections will tell lenders about your instability. A low credit score, even for an otherwise successful company, will cause a lender to impose a higher interest rate as a condition of providing financing. The potential for denial exists with a poor credit profile.
The solutions:
By paying off revolving debt, resolving past due accounts, and waiting to apply for financing until after not opening new credit accounts, you increase your chances of acquiring financing. Lenders prefer to lend to borrowers whose credit scores are greater than 680 and provide better terms for borrowers a small business acquisition loan whose scores are greater than 720.
2. Incomplete or Inaccurate Business Valuation
Lenders require a solid verification that the business you are buying is at a fair price and can generate enough earnings to pay the debt. A lack of or an improperly done valuation immediately triggers suspicion in the small business acquisition loan review process. Several applicants base their proposals only on the seller’s asking price or rough estimates with no formal valuation method. In the absence of a business valuation that systematically combines EBITDA multiples, asset values, and cash flow analysis, lenders cannot assess the risk properly.
The Solution:
Get a business valuation certificate from a professional, or if suitable, get help from advisors who have a good grasp of business acquisition funding. Not only will a definite valuation increase the chances of your application being approved, but it will also save you from paying more than the actual worth.
3. Lack of proven Profitability and Growth Potential
One of the most important factors for a small business acquisition loan is the ability to demonstrate profitability, either through the existing business or a clear plan for how the business can become profitable. Analyzing the business’s financial statements will give lenders insight into the business’s debt-service coverage. If the tax returns indicate inconsistent revenues or margins, or if there are unusual expenses, the underwriters may question the sustainability of the business.
The Solutions:
Supply a minimum of three years of clean financial statements. Normalize your earnings. Rectify any discrepancies. Documents showing profit viability can mean the difference between approval and denial.
4. Lack of Fungible Investment
Lenders want to have some type of monetary interest in the activity (real estate, equipment, etc.). If you are only requesting a small business acquisition loan with little or no investment on your end as a borrower, you will likely receive a rejection letter from the lender. However, if you can secure partial seller financing or other forms of structured equity, then you can mitigate the issue of “high risk” associated with your business when applying for an unsecured business acquisition loan.
The Solutions:
In order to show financial commitment, you should be prepared to contribute at least 10%-20% of the purchase price out of your own savings or from another qualifying source. This will prove to the lender that you are going to be involved in the success of the business.
5. Disorganized or Missing Documentation
It doesn’t matter how attractive the deal is if the borrowers are not presenting comprehensive information to the lenders. Unorganized finance packaging may cause the loan to be denied or even result in a delay when applying for a small Business Acquisition loan. Missing tax returns, unsigned purchase agreements, outdated financials, or unclear ownership structures are sources of unnecessary friction and reflect a lack of preparedness.
The Solutions:
Set up a file for all personal financial statements, business financial statements, valuation analyses, resumes, and acquisition agreements. A neat package indicates a professional individual or business.
Conclusion
A small business acquisition loan application is not a search for the greatest small business to buy, but rather the creation of a compelling narrative about how you can really use the loan. A poor personal credit rating, the failure to give a correct valuation, as well as poor and inadequate documentation, are some reasons among many that can result in the failure to acquire a loan. To ensure that you have a very low prospect of rejection, you should address any of these issues before preparing your loan application.
With the help of a seasoned lender who is an expert in the field of loans, you can develop a well-organized and very detailed financial package, which can help improve the prospects of acquiring a small business acquisition loan. With the entire process completed, your small business acquisition loan application will not only meet the requirements of your lender, but it will also become an attractive document.
