Acquisition Lending Options for Prospective Business Owners
Selling cost, expansion prospects and funding terms are only some of the important factors prospective business buyers contemplate when considering a purchase. No deal can be finalized without suitable liquid capital, which can render financing a top priority once the target company’s strategic valuation has been approved. Though there are numerous acquisition lending choices available, the right selection can depend on many factors.
Seller and Bank Financing
Due to recent economic fluctuations, numerous conventional moneylenders have altered their lending standards. As a result, capital can be more difficult to attain and initial payments often increase. Appropriate funding structures and credit sources can be contingent on potential growth, perceived risk, industry type, asset appraisal and income stream.
Two financing options are seller and bank. The former occurs when the seller carries a promissory note for the transaction price less the down payment made by the buyer. Commonly employed in mid to small market dealings, acquisition lending payment details, repayment times, interest rates and other details can differ depending on the settlement. The purchaser then issues payments to the seller. The latter can be a viable opportunity for those with suitable assets and credit scores who are looking to purchase businesses with solid earnings, minimal debt, a large number of assets and sales significantly exceeding costs.
Alternatives include Small Business Association loans and equity, mezzanine or asset-based financing.
SBA acquisition lending loans are issued through private partners such as banks and credit unions, and come with a government-backed guarantee. This often makes them more feasible for higher risk companies who could default on payments.
Equity financing can be practical in situations where earnings exceed $10 million. Often employing assistance from angel investors, venture capitalists or private firms, this option can necessitate the buyer conceding 50 percent or more of company control. The purchaser opts to raise money by selling securities. This can not only generate funds for the purchase, but can enhance the intended company’s function, as well.
Mezzanine acquisition lending typically allows the buyer to retain a good percentage of control. It continues to rise in popularity due to its fusion of equity and debt financing.
In asset-based financing, loans typically come with high interest rates and rely on collateral assessments. Revenue quality and debt are also taken into consideration. These loans may borrow up to 80 percent of asset classes where “collateral” can include equipment, inventory and accounts owed.
The Right Choice
Just as businesses are unique, so, too are the expenditures, contracts, opportunities, agreement terms and assessment standards that comprise their acquisitions. Buyers who evaluate the target company and research financing methods can find themselves well positioned to determine the best solutions for their unique needs.