What Do Lenders Look For in a Business Acquisition Loan Application?

Lenders use acquisition loan applications to answer one core question: can the combined borrower and business reliably repay this loan? Underwriting examines the borrower (credit history, liquidity, experience), the target business (historical financials, margins, customer concentration), and the deal structure (down payment, collateral, seller financing). Below I summarize what underwriting teams routinely check, why it matters, and practical steps to strengthen an application.

1) Borrower credit and financial background

  • Personal credit score and history: Lenders look at the buyer’s credit report and often require a FICO score in the mid-600s or higher for conventional financing. For low-risk pricing or SBA-backed loans, better scores (700+) improve terms. Scores are a shorthand for payment behavior, but lenders also read the full credit file for collections, recent inquiries, and bankruptcies.
  • Personal financial statement and liquidity: Expect to show cash reserves, savings, retirement accounts, and investments. Many lenders want enough liquidity to cover personal living expenses and several months of debt service if the acquired business underperforms.
  • Debt-to-income and leverage: Underwriters test whether adding the new loan makes the buyer over-leveraged. High personal liabilities can push an otherwise strong deal into decline.

In my practice, I’ve seen technically creditworthy buyers denied because they didn’t disclose a cosigned student loan or a large margin loan; full transparency is essential.

2) Target business financials and cash flow

  • Historical statements: Lenders typically ask for at least two to three years of tax returns and business financial statements (profit & loss, balance sheet). They reconcile tax returns with internally prepared books to verify cash flows.
  • Adjusted EBITDA and seller discretionary earnings (SDE): Lenders calculate adjusted earnings to judge the business’s ability to cover debt. For small acquisitions, SDE is often used; for larger, EBITDA is typical.
  • Debt Service Coverage Ratio (DSCR): Many lenders look for a DSCR above 1.2–1.4 (i.e., cash available to cover debt payments by 20–40%). The exact threshold depends on industry risk and collateral.
  • Customer concentration and recurring revenue: Businesses with a few large customers or lumpy sales are riskier. Recurring contracts and predictable margins make approval easier.

For example, a manufacturing firm with stable multi-year contracts and predictable margins will underwrite more favorably than a seasonal retail shop with a single large customer.

Related resource: read more about cash flow forecasting and lender expectations in our guide on the Role of Cash Flow Forecasts in Business Loan Decisions (https://finhelp.io/glossary/the-role-of-cash-flow-forecasts-in-business-loan-decisions/).

3) Industry, operations, and management experience

  • Buyer experience: Lenders prefer buyers who have worked in the business’s industry or previously managed businesses. First-time owners may still get loans, but they’ll need a stronger package or a higher down payment.
  • Operational risks: Due diligence addresses supply chain, customer churn, regulatory issues, and lease terms. Lenders sometimes require professional management in place if the buyer lacks relevant experience.

In my experience advising buyers, including a short transition plan (seller stay period, key employee retention) often reduces perceived execution risk.

4) Deal structure and collateral

  • Down payment: Lenders usually expect the buyer to contribute equity. A typical down payment ranges from 10%–30% of the purchase price, depending on lender type and loan product. SBA 7(a) loans often allow lower down payments than conventional bank loans but still require meaningful owner equity.
  • Collateral: Real estate, equipment, and accounts receivable are common collateral. Some lenders accept only a business lien and require a personal guarantee. For lenders that value assets, have clear documentation and appraisals ready.

See our collateral options overview to compare alternatives beyond real estate: Collateral Options for Small Business Loans: Beyond Real Estate (https://finhelp.io/glossary/collateral-options-for-small-business-loans-beyond-real-estate/).

5) Seller involvement and non-bank financing

  • Seller financing: If the seller provides a note as part of the purchase, lenders view this favorably because it indicates seller confidence and reduces external financing needed.
  • Earn-outs and holdbacks: Contingent payments reduce lender exposure but complicate underwriting. Lenders require clear legal agreements.

6) Documentation lenders expect (checklist)

  • Personal tax returns (last 2–3 years)
  • Business tax returns and financial statements for the target (2–3 years)
  • Interim P&L and balance sheet (most recent 3–6 months)
  • Business plan and 12–36 month financial projections with assumptions
  • Purchase agreement, asset list, and equipment schedule
  • Lease agreements and material contracts
  • Personal financial statement and proof of liquid assets
  • Resumes for buyer and key managers
  • Appraisals or valuations (if applicable)

Providing these in a single organized packet shortens underwriting time. Lenders dislike surprises that appear late in the process.

7) How lenders value projections and the business plan

Lenders want realistic, conservative projections tied to clear assumptions. Highlight near-term cost savings, customer retention plans, and incremental revenue opportunities. Don’t inflate growth rates; conservative scenarios with sensitivity analysis (best case, base case, downside) build credibility.

In my practice, adding a 12–24 month cash flow waterfall (monthly) showing how you will cover loan payments during slow months makes underwriters comfortable and often speeds approvals.

8) Common ratios and underwriting tests

  • DSCR (Debt Service Coverage Ratio): Shows net operating income divided by annual debt service. Lenders seek DSCR comfortably above 1.0—commonly 1.2–1.4.
  • Loan-to-Value (LTV): For asset-backed loans, LTV measures loan amount versus collateral value. Lower LTVs reduce lender risk.
  • Break-even analysis and working capital sufficiency: Lenders test whether the business can withstand revenue declines and still meet obligations.

9) Typical loan products and terms

  • Conventional bank term loans: Competitive rates, stricter underwriting, typically 5–10 year terms for business acquisition loans.
  • SBA 7(a): Popular for acquisitions—SBA guarantees a portion of the loan (making approval easier for buyers with less equity). SBA 7(a) frequently offers up to 10-year terms for business acquisitions; real estate or real estate-heavy transactions can have longer amortizations. See the U.S. Small Business Administration for current program details (https://www.sba.gov/).
  • Seller financing, mezzanine debt, or subordinated notes: Used to fill equity gaps, often with higher cost or contingent pay structures.

10) Common application mistakes and how to avoid them

  • Missing or incomplete tax returns and reconciliations: Lenders reconcile tax returns to profit and loss; unexplained differences create delays.
  • Unrealistic projections and unsupported assumptions: Avoid overly optimistic sales growth. Include documented assumptions and conservative scenarios.
  • Undisclosed liabilities: Always disclose outstanding contingent liabilities, pending litigation, or unreported loans.
  • Weak due diligence on leases or contracts: A lease with short term and steep rent hikes is a red flag.

11) Ways to improve approval odds

  • Increase equity contribution or secure a larger down payment.
  • Strengthen personal credit and reduce non-mortgage consumer debt.
  • Obtain seller financing or a letter of intent that shows seller commitment.
  • Bring guarantors or co-borrowers with industry experience and stronger credit.
  • Prepare a clear 12–36 month operational plan and monthly cash flow forecast.

12) Regulatory and tax documentation considerations

Lenders often require recent business tax filings to verify revenue and expense history. The IRS records and tax transcripts can be used to confirm returns; consider working with your CPA to ensure returns are clean and reconciliations are documented (see IRS guidance on business tax records at https://www.irs.gov/). For regulatory compliance and consumer loan guidance, the Consumer Financial Protection Bureau provides lender and borrower protections (https://www.consumerfinance.gov/).

Case examples (anonymized)

  • Café acquisition: The buyer presented three years of tax returns, a 15% down payment, and a 24-month cash flow forecast showing break-even within 6 months. The lender approved a 7-year term loan after confirming retained customer base and lease stability.
  • Manufacturing purchase: A buyer with prior industry experience, strong personal liquidity, and two-year purchase order contracts received favorable terms from a regional bank because the DSCR exceeded 1.5 under conservative projections.

Final checklist before submitting an application

  1. Reconcile tax returns to internal books and prepare a one-page executive summary of key metrics.
  2. Build monthly cash-flow projections for 12–24 months with sensitivity scenarios.
  3. Confirm the seller will provide a complete asset list and any requested warranties.
  4. Secure personal financial statements and proof of liquid assets.
  5. Speak with an SBA lender early if you plan to use SBA financing.

Professional disclaimer

This article is educational and informational only and does not constitute financial, legal, or tax advice. Application requirements vary by lender and loan product. Consult your CPA, attorney, or a qualified business finance advisor to review your specific transaction.

Sources and further reading

Further reading on FinHelp.io:

In my practice helping buyers for more than a decade, careful preparation and conservative forecasts are the single most reliable way to move from application to approval. Thorough documentation reduces surprises, speeds underwriting, and often improves pricing.