- Posted April 29, 2014 by
Business Acquisition Financing
If the company you are looking to acquire consists of a lot of assets, strong profit margin, and positive cash flow, you will be able to go for bank financing. But, on the contrary, if your target company has short term assets, then the level of difficulty in you obtaining bank financing for the acquisition will typically increase. Recent researches have stated that loans based on cash flows have decreased considerably, as a result of debt load, insufficient collateral and the quality of cash flow.
The type of collateral pledged for the loan is being taken into serious consideration by lenders when it comes to approving the loan. Also, in the present rigid credit market, you should possess good credit scores or credit history and also significant assets. This is because the amount of unsecured business acquisition loans offered is very less. So, the loan has to be secured by your company’s cash flow, assets, or at least by your personal assets.
In the case of transactions happening in the small and middle markets, it is a common practice that the seller finances for a portion of the transaction to be made. One of the easiest ways of seller financing is that you as the buyer will make a down payment and the seller will hold a promissory note for the remaining price of the purchase. The significant assets of the business will serve as the prime collateral for the promissory note.
This type of financing has been becoming quite popular in recent years. Asset-based loans are basically revolving loans that are secured by any available collateral, such as accounts receivable, fixed assets, equipment and inventory. The amount that can be obtained from the loan will typically range from 65 percent to 80 percent of the total value of the asset.
This type of business acquisition financing involves the selling of the securities placed by the buyer, in order to raise capital for paying the seller and also to fund for the working capital required for the operations of the acquired company. In most cases, the buyer will obtain equity from different sources like venture capitalists, angel investors, and private equity firms.
Each source of capital or lender will have criteria of its own, which will even be modified often. Therefore, it is important that the buyer spends enough time to properly analyze and compare between all the different options in order to end up with the best source.