Consider Asset-Backed Financing for a Business Acquisition
There are many ways to cover the costs of a business acquisition.
When considering the costs of a business acquisition, entrepreneurs often overlook asset-backed financing as a viable option. This type of financing allows business owners to leverage their company's assets, such as inventory, machinery, or non-mortgaged real estate, to secure fast funding. While asset-backed loans may not be the first choice for many, they offer distinct advantages over other forms of financing. In this article, we will delve into the benefits, workings, and application process of asset-backed loans, shedding light on this often-underutilized financing solution.
Why Choose Asset-Backed Financing?
There are several compelling reasons why entrepreneurs opt for asset-backed loans when financing a business acquisition:
Access to Sufficient Capital: Asset-backed loans provide the opportunity to secure more capital than what may be available through other funding sources, allowing business owners to meet their financial requirements effectively.
Flexible Eligibility: For those who don't qualify for traditional term loans, asset-backed financing offers an alternative route. Lenders primarily consider the value of the business assets rather than strict eligibility criteria, making it easier for entrepreneurs to obtain the necessary funding.
Preserving Personal Assets: Unlike some financing options that require personal assets as collateral, asset-backed loans utilize the business's assets as collateral, safeguarding the owner's personal belongings.
Leveraging Business Assets: If the business being acquired or the existing business possesses valuable assets, leveraging those assets can be a strategic approach to achieving funding goals.
Understanding the Loan Process:
Asset-backed loans operate based on the value of the assets involved. Lenders typically allow borrowers to borrow up to 85% of the value of accounts receivable and up to 50% of inventory or equipment value. The loan structure can either be a revolving line of credit or a lump sum loan, depending on the borrower's preference.
Potential Asset Loss:
In the event of default, lenders have the right to seize the assets put up as collateral, liquidate them, and use the proceeds to cover their losses. This collateral acts as a safety net for lenders, making asset-backed loans more attractive due to their lower perceived risk compared to traditional term loans.
Applying for an Asset-Backed Loan:
To start the application process for an asset-backed loan, entrepreneurs should identify banks and credit unions that offer this type of financing. Online banks like GoKapital and Commercial Loan Direct can also be explored as potential lending options. It's crucial to inquire about payment plans, terms, and the speed of the approval process to find a lender that suits your needs.
Gathering the necessary documents is the next step. These typically include balance sheets and profit-and-loss statements for the past two years, sales projections for the business being acquired, personal and business tax returns, and personal banking statements for the past year. Additionally, a detailed list of assets and their respective values should be provided, including inventory statements or equipment/machinery descriptions.
Once the loan application and supporting documents are submitted, lenders will conduct due diligence, including verifying the absence of outstanding liens on the assets through a Uniform Commercial Code search. The lender may also engage a third-party firm to audit financials while reviewing the application.
If the initial review is successful, lenders may present a non-binding offer outlining the loan amount, interest rate, and terms. A term sheet is then signed, and a due diligence fee may be paid for the lender to proceed with their assessment. This typically involves an in-person evaluation of the collateral items.
Upon approval, closing documents are provided, and the requested financing is disbursed shortly after signing and submitting these documents.
Asset-backed financing presents an often-overlooked solution for covering the costs of business acquisitions. With its flexible eligibility criteria, leveraging business assets