Acquiring a new business can be very helpful, especially ifyou want to grow and provide new services/products to your audienceacurrent business or enter into business ownership. However,business acquisition can be very expensive, and that’s why where debtfinancing can be a great solution. Debt financing involves borrowing money froma funding organization or a bank. Once you borrow, you will have to repay themoney plus interest within the set timeline. Here are some of the best debtfinancing options!
The Small Business Administration offers a variety of loansvia credit unions or banks. You go to the approved lender, and they will applyto the SBA to receive a loan guarantee. What this means is even if you defaulton the SBA loan, the government will be paying the lender the guaranteedamount. You will still owe money to the government, but itis a higher conviction loan which can be more expensive (higherinterest) than other forms.
A term loan is borrowed from a financial institution for aspecified timeline. You will need to repay the loan in regular, usually monthlyinstallments. Those installments will include the principal (amortization),along with accrued interest. Term loans can be anywhere from 1-10 yearstenure, but some are even longer, depending on the situation.
Bonds are a great option because you can issue them wheneveryou raise capital. You sell bonds to investors, and they thenpay only interest with low to no principal payments until the bond is mature (aballoon payment)will pay the money back until a specified date.It’sa very good way to raise capital, especially when it comes to debt financing.
If you want to acquire money to purchase another business,getting a line of credit can be a very good idea. Lines of credit are differentwhen compared to a term loan, for example. The idea here is that you’reborrowing money as needed, and you repay a mix of principal and interestpayments. Generally, you are approved to borrow up to a limit, which is usuallyagreed upon.
Private credit can also be an option if you need businessacquisition funds. These private credits come directly from private equityfirms, alternative asset managers, or business development companies. Yes,these are not issued by a bank. A lot of the time, these private credits come inthe form of venture debt.
Mezzanine financing could be an interesting approach becauseit helps combine elements of equity and debt financing. The way this works isit allows lenders to obtain equity interest, if the loan they offered is notpaid back in time. There’s an incentive for you to repay the debt in time, butif you can’t, the lenders will become investors. While it’s not the most commonway to find debt financing, it can 100% be an option to consider here.
A management buyout appears when the current management teamof the company is acquiring the business from its current owners. Sometimes, athird party like you can go in and connect with the management team, or you canrepresent them as a part of the purchase. It’s a less popular financing option,but certainly worth taking into account.
In the case of a leveraged buyout, most of themoney you need comes from loans backed by acquired assets. One thing to noteabout these leveraged buyouts is they can have a high risk, yet they can bevery rewarding. A lot of private equity firms used these leveraged buyouts whentrying to acquire new businesses.
The seller financing or vendor takeback loan is aninteresting approach, because the seller of a company will extend a loan totheir buyer. That way, the buyer can easily cover at least a part of thepurchase price. If the buyer has great plans for the company yet they struggle toget all funds together, it’s normal for a seller to try and assist them. Theseller financing approach is quite interesting and certainly useful, especiallyif the buyer wants to avoid high-interest-rate loans!
All of these are great solutions when it comes to debtfinancing, and it all comes down to your company’s expectations andrequirements. While some businesses will be ok with an SBA loan or a term loan,others prefer issuing bonds or using a line of credit. Regardless of theoption, these are valid solutions if you require effective and quick debtfinancing!
