How to Finance Your Small Business Acquisition
- 18 Aug 2024
- Buy Online Business
Financing your small business isn’t really a big deal if you know how to pitch your business to investors. Business acquisition is a great opportunity to grow footsteps and expand in new horizons. However, acquisitions also call for investments that might not always be available. In such cases, businesses have to look beyond personal finances to get funds for business acquisitions.
Here, we are to help you buy the best business growth opportunity before it is cashed by someone else. Let’s get started:
1. Bank Loans: All major banks have provisions to help businesses take on debt to grow. If your business is well-established and has all legal work done, you can easily apply for bank loans. All you need to do is provide a well-researched merger and acquisition strategy to persuade the banks to prioritize sanctioning a loan to your business.
2. Use Company Funds: Company funds can be used to make an acquisition. If you haven’t set funds or allocated funds for expansion, you should start doing it now. This helps save from taking loans and paying interest rates. Company funds should, however, be the first option when closing an acquisition.
3. Use Company Equity: If company funds are not available, you can look try company equity. There are three ways you can use company equity – equity financing, equity investment, offer company share. The equity financing is a methods used to raise capital by issuing new shares in the company. The equity investment is method to raise funds by purchasing the majority of the shares of the company.
4. Third-Party Financing: Third-party financers are non-banking firms that offer loans. They may charge more in terms of interests. They help with financing only if they have faith in your business. So, if you are able to win their trust you can expect to get the financing.
But, when finding third-party financers, you also need to do some homework. Always cross-check the background of the third-party financers so you don’t have to face a rough time when taking out a loan.
5. Opt for Joint Venture: If you think it is challenging to fund the new acquisition, ask other businesses or your friends to make a joint acquisition. In a joint venture, you share not only business acquisition costs but also revenue and expenditure and even losses.
6. Use Mezzanine Debt: The Mezzanine debt option is a trick but a successful option if you don’t wish to use the equity of your company to raise funds.
Mezzanine debt allows lenders to create a loan with a unique conversion feature: if the borrower cannot repay the debt in cash, the debt can be repaid with equity in the borrower’s company. The Mezzanine debt lets the lenders draft a loan with unique features. The lender can include clauses such as if the borrower is not able to pay in cash; the debt can be repaid with equity in the borrower’s company.
7. Leveraged Buyout: Leveraged buyouts, also known as LBO, is a type of debt financing in which the company interested in buying or acquiring a business borrows the majority of the funds from private equity firms. Before using the LBO, you need to have a solid plan to improve the market position of the newly purchased company to ensure smooth cash flow when paying back the loan.
8. Use Asset-backed Loan: Asset-backed loan (ABL) is a type of financing in which you raise funds through debt and use assets as collateral. In LBO the company uses the shares of targeted or newly acquired company, while in ABL the company uses its own assets as collateral. If you plan to use ABL to raise funds, you need to have plans to ensure you are able to repay the loan timely.
There are many ways to raise funds to acquire a business. When planning to purchase a business, make sure you carefully evaluate the net worth of the targeted business and have a full-fledged plan to use it to earn profits. The revenue generated through the acquisition can help you pay off debts and stay profitable in the market.
