Considering buying a business? Are you asking yourself, from where will I get the money?
The majority of acquisitions will require funding from a variety of sources.
Typical sources include:
- Buyer's Own Funds - cash or a secured line of credit
- The Seller - owners will often consider part financing a transaction over time, for the right candidate
- Bank Loans - in some circumstances banks will provide financing, subject to the type and size of business being purchased
Securing financing can often be the "hold up" for most deals, whether it be for acquiring a business or financing for another type of project such as expansion, construction, equipment, etc.
Below is an article I have written titled "How to Get Financing that Fits", its focus is on what lenders typically look at when making financing decisions. You may find the information most helpful as it can help you to better prepare your financial "resume" for the time when you may need to seek financing.
How to get Financing that Fits
When approaching lenders for your next financing request, it is useful to consider the factors lenders look at when making financing decisions. Travis Kellett, financing consultant with a decade of banking experience, offers the following guide for your financing request. The factors lenders are considering can be approximated using the 4 C's of credit, which are detailed below.
Lenders know that good character of the borrower can go a long ways to ensure their loan is repaid, so they consider the way the owner has handled previous credit granted. They use credit bureau information and consider the previous loan history with the other lenders. If refinancing another lender, they may request a credit report from the previous lender to assess your repayment history.
Lenders know that the project's capacity to repay their loan is based on the cashflow of the project. Lenders consider the annual rent roll of the property, actual and industry average expenses, as well as historical vacancy trends. They are looking for proof of enough future cashflow to repay their loan, with enough surplus to allow for maintenance and replacement of aging building infrastructure. This is expressed as a debt service coverage ratio, and lenders usually like a margin of at least 1.25:1.
What is the realizable value of the security pledged? Lenders know that the value of assets depends on the motivations of the buyer. Discounts of 25% - 50% are common in forced sale situations. Lenders further discount these conservative liquidation values to approximate selling fees they will incur if forced to resell the property. This all can result in less financing for your assets than you may have initially expected.
Lenders want to know what the funds will be used for, and have a complete assessment of costs of the project, along with a plan of who will pay for what. They will ask where your personal investment in the project is sourced from, and will usually verify this source. They will want to ensure the funds are used for a purpose that they approve of. Repayment terms vary by the lender, with important implications to your project's cashflow. It's important to find the one that offers you the terms you want that best fits your project.
By considering the above 4 C's, you can ensure your next financing request will get traction with your lender, and you can get the deal with the terms you want. For more information specific to your project and financing needs, please contact us.