Small business owners might be looking to purchase an existing business and expand their current operations. Before doing so, they must find the funding for this acquisition. What financing options should they consider when making this purchase?
Why is Financing Important in Small Business Acquisitions?
Acquiring an existing business comes with a price tag. The business owner may not have ready access to the funds needed to complete the purchase. They turn to financing options to complete the transaction and pursue the goal of expanding. Doing so allows them to preserve their cash reserves and safeguard their working capital. They can leverage the financing options to ensure they have money for operational expenses and unexpected costs.
In addition, financing grants them access to a larger pool of capital, allowing them to pursue an acquisition that might otherwise be out of reach. They can look into acquisitions with higher valuations and more significant growth potential. When this acquisition is added to the existing business, they may see a higher return on investment. Finding the right financing option for the purchase is critical.
Financing Options
Most business owners consider buying a business with a loan. However, other avenues exist. The owner should consider all options to find the one that is best for the current acquisition, even if they have successfully used other options in the past.
Conventional Bank Loads
A business owner may first research conventional bank loans because they know they will get a favorable interest rate and repayment terms. To secure the loan, they must have a solid business plan and demonstrate they can repay the funds. They will also need collateral in most cases. The lender requires this to ensure the business owner is creditworthy.
SBA Loans
Another option is a Small Business Administration (SBA) loan. The government backs these loans, so they come with favorable terms and a typically low down payment. The application process is extensive, and the buyer must adhere to eligibility criteria.
Seller Financing
A seller might agree to finance the purchase. This option allows for more flexible terms and often simplifies the process. However, the buyer and seller must trust one another before making this arrangement.
Asset-Based Financing
A business owner might choose to pledge the assets of the acquired business as collateral. These assets may include equipment, inventory, or accounts receivable. The amount of capital provided is based on the assets’ value.
Alternative Sources
Alternative financing sources are becoming more commonplace. Crowdfunding is one alternative source that business owners should consider. The entrepreneur raises capital through public or private investments to fund the acquisition’s purchase.
Choosing a Financing Source
Business owners must consider the financial feasibility of taking on a loan and the repayment terms before proceeding. They need to ensure they obtain the most favorable terms to see the highest return on investment. When doing so, collateral requirements must be considered, and the option selected should align with the company’s long-term goals and growth plans. Finally, the qualification criteria need to be considered, as a business owner might find they aren’t eligible for specific options because they don’t qualify.
Regardless of which option they select, a business owner must recognize the importance of due diligence. They need to ensure the target business is viable and profitable. Lenders will do the same, so the business owner should know what they are dealing with to ensure the purchase is right.