There are several different options for a company interested in acquisition financing. With each option, the end goal of the borrower is the same: to obtain enough cash to acquire a business.
Generally speaking, there are two basic types of acquisition financing:
- Traditional loan
- Line of credit
For a buyer, the type of financing will play a large part in determining whether or not the opportunity is worth pursuing as well as the timeline on which they must move forward.
The buyer is interested in a cost effective option that allows them to secure the appropriate funding without delay.
In addition to determining which type of acquisition financing is best, there are several details to consider with each option:
- Interest rate
- Application process
- Amount of time it will take to receive funding
Choosing the Best Type of Financing
The type of financing best suited to the buyer is going to depend on many factors, including but not limited to:
- Type of business being purchased, as well as the industry in which the buyer is currently involved.
- Value of assets. Do you have enough collateral to receive a loan?
- Profitability. If you are going to acquire a business it would be in your best interest to be able to show a strong balance sheet, while also proving to the lender that the deal you are interested in would work in your favor over the long run.
- Industry risk. As you know, some acquisitions carry a higher risk than others. This is not to say that a risky transaction should be overlooked, however, lenders often times rely heavily on this when making a decision of whether or not to loan money.
- Growth potential. As noted above, lenders want to see the potential for growth once the financing is secured and the deal between the two parties is complete.
Three Acquisition Loan Options
If a line of credit has been ruled out, it is time to consider the many types of acquisition loans. Here are three to consider:
- SBA bank financing. This is one of the most common forms of financing for small to medium sized businesses. In most cases, lenders require collateral.
- Seller financing. While it may not always be the best option, it is one to consider. Some buyers ask the seller to finance the entire purchase price, although asking for partial financing is just as common.
- Equity financing. This includes the use of individual private equity investors or private equity groups. In either case, the company is exchanging equity in their business for cash.
Before making a final decision on any type of acquisition financing, answer the following questions:
- Are you 100 percent sure that acquiring the company would be in your best interest?
- Which loan option is offering the most beneficial terms and conditions?
- Is the lender well respected and reliable?
With a growing number of companies looking to acquire other businesses, acquisition financing is becoming more and more common. Thanks to a variety of financing options, moving forward has never been easier.