Suppose you plan to acquire a competitor’s business valued at ₹2 crore but have only ₹50 lakh saved. How can you cover the remaining amount? A business loan could be the solution.
Let’s say you secure a loan for ₹1.5 crore at an interest rate of 10% per annum, payable over five years. Your monthly EMI would be around ₹3.19 lakh. Now, if the acquisition increases your profits by ₹5 lakh a month, the loan starts to make sense.
Business loans for acquisitions have become a common tool for entrepreneurs aiming for growth. In fact, a Forbes Advisor survey found that 25.4% of business owners sought financing specifically for business acquisitions.
But is this the right path for everyone? Let’s find out the advantages and risks to help you decide.
What Are Business Loans for Acquisitions?
Business loans for acquisitions are financing options designed to help companies buy other businesses. These loans give you immediate access to funds, enabling growth without depleting your reserves. Here’s an example:
| Loan Type | Loan Amount (₹) | Interest Rate | Repayment Period | Monthly EMI (₹) |
| Term Loan | 1,50,00,000 | 10% | 5 years | 3,19,000 |
| Asset-Based Loan | 1,50,00,000 | 12% | 5 years | 3,34,000 |
| SBA Loan Equivalent | 1,50,00,000 | 8% | 7 years | 2,34,000 |
These loans vary by terms, interest rates, and collateral requirements. For instance, term loans are straightforward but may have higher EMIs than longer repayment options like SBA-type loans.
Pros of Using Business Loans for Acquisitions
Business loans come with several advantages. Here are a few:
- Tax Benefits: The interest paid on business loans is tax-deductible in India. If you pay ₹3 lakh in monthly interest, you could save up to ₹1 lakh in taxes annually, depending on your tax slab.
- Scalable Growth: Loans allow you to capitalise on opportunities without delay. For instance, acquiring a smaller competitor can instantly increase your market share.
- Customised Repayment Plans: Many lenders offer flexible repayment terms, allowing you to align EMIs with your cash flow.
- Improved Credit Score: Successfully repaying a large loan boosts your business credit rating, making future financing easier.
Cons of Using Business Loans for Acquisitions
While loans provide many benefits, they also come with risks:
- Debt Burden: High EMIs can strain cash flow, especially if your acquisition doesn’t generate the expected revenue. For example, an EMI of ₹3.5 lakh per month might be unsustainable if profits fall below projections.
- Collateral Risk: Many loans require you to pledge assets. Losing critical assets can cripple your business if you default.
- High Interest Costs: A ₹2 crore loan at 12% for five years can cost ₹72 lakh in interest alone—almost half the principal amount.
- Market Uncertainty: Economic downturns can impact your ability to repay, putting both businesses at risk.
Key Factors to Consider Before Taking a Business Loan for Acquisitions
Before committing to a loan, evaluate these factors:
- Acquisition ROI: Calculate the revenue increase from the acquisition. For instance, if your profits grow by ₹60 lakh annually and your loan costs ₹50 lakh per year, the ROI is positive.
- Loan Terms: Compare lenders for interest rates, repayment periods, and processing fees.
- Risk Management: Have a contingency plan if revenues fall short, such as a phased repayment option.
Alternatives to Business Loans for Acquisitions
Sometimes, loans may not be the best option. Here are alternatives:
- Equity Financing: Raise funds by selling shares in your business.
- Joint Ventures: Partner with another firm to split costs and risks.
- Retained Earnings: Use profits from your existing business instead of taking on debt.
Conclusion
Business loans for acquisitions can unlock growth but come with risks. Success hinges on thorough planning, realistic ROI expectations, and a strategic repayment approach.
Remember, a ₹2 crore acquisition can either elevate your business to new heights or burden it with unmanageable debt. Are you ready to take that leap?
FAQs
- What is the average interest rate for business loans in India?
Around 10%–15%, depending on the lender and loan type. - Do I need collateral for a business loan?
Yes, most loans require collateral like property or equipment. - Can I prepay my business loan?
Many lenders allow prepayment but may charge a penalty. - How do I calculate EMI for a business loan?
Use the formula EMI = [P x R x (1+R)^N] / [(1+R)^N-1], where P = principal, R = interest rate, and N = tenure.
