Are you looking to finance the acquisition of a company? Like most buyers, the chances are you are not just using your own capital. If so then you are probably exploring what other choices there are for business funding.
Most clients normally have their business finance in place, but if not we recommend exploring this as early as possible. There is nothing more frustrating for a Vendor, or embarrassing for a Buyer, to have a deal agreed, but not able to complete due to a lack of funding.
Before we give you the options, there are several important first steps that will help you consider your application for finance:
Note that in almost all cases the level of funding available to you will be related to the business you are seeking to acquire. Therefore you can’t make a firm offer for a company without having it looked at first by the lenders. So, even if you have explored some of the options, you will still need to review what you can do once you have a specific target company for sale.
For the record, we have also not covered various secured business loans or personal debt. Clearly, if you are prepared to remortgage a house, or to leverage personal credit cards, then this is another means of funding. But, because most buyers we talk to are seeking financing against the business they are acquiring, we have not reviewed these options. If you’re not sure where you stand, you can always call the team on 01962 609 000 or send us an email about your acquisition plans.
Now we’ve got that out of the way, onto your options.
If the company you are seeking to buy has significant assets on the balance sheet then asset finance is a good option. It is essentially a loan against the assets of your business and reduces the risks of the company purchase. However it does mean that ownership of such assets are transferred to the lender so until you have paid the finance back, your assets are no longer fully yours. The interest rates on such loans are relatively low as the assets are the security.
A bridging loan is a loan for a relatively short period of time: days, weeks, or a month. They can be really useful to provide short term financing support for specific purposes. For example, if you are acquiring a company but then intending to sell some of the assets, a bridging loan may be a better option than longer-term finance.
Bridging loans can be closed, where there is a fixed repayment date, or open where there is an expectation of when you will pay it off, but no specific date. As with all lending, if you are in danger of missing expectations you need to talk to the lender as early as possible in the process.
This loan scheme was initially extended to November 2020 but, given the lead time, it may be too late to set up a CBILS loan in a company you intend to acquire. However, it has been announced that there will be a new scheme in January 2021. Furthermore, if a company you are acquiring has such a loan there may be reasons to take that loan into the new ownership or convert it into a longer-term loan facility.
A lender can offer invoice financing as a great means of giving you liquidity to grow. Once you have secured the lending, the main difference is that your lender will pay out an agreed proportion of invoices you issue and, for that, they will take fees.
If the company you would like to acquire deals in international trade, particularly if an exporter, we would recommend trade finance. This type of commercial finance enables the company to be paid on agreement or dispatch, with the credit extended to the importer through the finance company. Often trade finance can be used as much to protect against the risk of international transactions, rather than specifically to assist with an acquisition.
If you want an acquisition loan without offering security, an unsecured business loan might be available to you. Unsecured loans are a great funding option for businesses without many assets or for buyers who prefer not to offer security. These loans are often smaller than Asset Finance, or Secured Business Loans, but if you have a good personal credit history, or your company has a strong credit score, then it is worth exploring.
Secured business loans can often actually be one of the other lending vehicles listed in this article. For example, they may be asset-backed or underwritten by a personal guarantee. Generally, they will be larger than an unsecured loan, and often at a lower interest rate. However, the payoff is that you have offered security and therefore there is more pressure on you to repay.
Some buyers prefer to steer clear of properties when it comes to buying a business because they raise the overall consideration. However, there are some benefits of acquiring the property too, particularly when it comes to raising finance. So, if there is a property involved in the business, and it comes with a small or no mortgage, then the smart buyer will be exploring finance against the building to raise capital for the business purchase.
As you can see there are many different ways in which you can finance the acquisition of a small or medium-sized business in the UK. And with a range of ways of structuring your offers, the acquisition is not out of reach for the smart business buyer.
Call us on 01962 609 000 for an impartial conversation to discuss your options.
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