If you have come into a position that allows you to pursue business acquisitions, there are a variety of financing options that may be available to your business. The type of financing you choose may be affected by the growth opportunities available, your credit worthiness, purchase price and what financing terms are agreeable to you. Here are 5 common types of acquisition financing.
Bank financing is often easiest to obtain in situations where the target company has a large amount of assets with strong profit margins. The buyer will probably also have to possess a good credit score, cash flow and available assets. The chances of being approved for a bank loan are increased if the buyer or the seller already has an established relationship with a bank.
Traditionally, lenders for business acquisitions will look at cash flow and then collateral before issuing a loan. With asset-based financing, collateral is considered first, then debt load and quality of earnings. Inventory, equipment and accounts receivable are used to secure a revolving loan.
Most common in small and medium sized transactions, the seller may finance part of the transaction. The purchasing business will make a down payment to the owner of the business that is being purchased. Both parties will agree upon the terms of the loan, including interest rates and the length of time.
Equity financing is often used in medium and larger transactions. If there is a possibility for a large return on their investment, private equity firms or venture capitalists will offer sizeable amounts of cash in exchange for substantial control over the company. This debt-free method of obtaining capital should only be used by business owners who are willing to relinquish a significant amount of control over their company.
Mezzanine loans are a high-risk debt, but they offer lenders and businesses a high rate of return on their investment. Requiring little to no collateral, a mezzanine loan can typically be paid in part with stocks, partial ownership or in equity in the business of the borrower. This type of loan can be especially beneficial for businesses expecting exceptionally rapid growth after their acquisition.
Securing capital for business acquisitions can be a daunting task for any for any business owner, no matter what size your business is. Making sure you have a well thought out business plan based on the combined ventures will help you secure financing with more agreeable terms. Considering a variety of lenders will also help your business obtain ideal rates.