How to Get Business Acquisition Financing
The financing you can secure for an acquisition depends on the type of business as well as its cash flow, assets, market risk, and plans for growth. In the past, traditional lending institutions covered a large percentage of an acquisition purchase price, but now buyers have numerous funding alternatives such as asset-based, seller, equity, and mezzanine financing. Here are some options to consider when you need acquisition financing.
Bank financing is fairly straightforward for acquisitions that have strong cash flow, significant assets, and wide profit margins but more problematic for companies with short-term assets and significant amounts of receivables. Buyers need strong credit scores and collateral. Look to banks with histories of financing the type of acquisition you are considering, and don’t give up after the first try.
Unlike traditional lenders, which first analyze cash flow when making acquisition financing decisions, asset-based lenders first consider collateral and then quality of earnings and debt load. This financing involves revolving loans secured by accounts receivable, inventory, equipment, and other forms of collateral. You can usually borrow from 65 to 80 percent of the asset value, and interest rates are typically higher than those of traditional lenders.
In seller financing, buyers typically make a down payment and then provide sellers with a promissory note for the balance of the price. The collateral is the business and its assets, and specific terms are negotiated between the buyer and the seller.
In equity financing, venture capitalists, angel investors, and private equity firms purchase securities from the buyer as a means of raising acquisition financing and working capital for middle-market companies. Buyers must be ready to forsake a significant amount of company control, and equity buyers expect a high rate of return and a defined exit strategy.
Mezzanine financing is a combination of equity financing and debt financing. This form of acquisition financing is growing in popularity, as buyers are able to retain more control.
For more advice on acquisition financing, contact Oakwood Commercial Capital.