If your business is growing, you will likely have a need for financing of an acquisition.
The term “acquisition” doesn’t always mean buying a business, but can include specialized equipment, intellectual property, a line of business, technology or a new location.
Receiving the money to fund the acquisition is only one piece of the puzzle. A total financial plan considers the overall financial position to minimize the financial stress on your business. It addresses how to account for intangible assets and working capital while maintaining solid cash flow.
The U.S. Small Business Administration (SBA) partners with banks to offer loan programs that can be particularly beneficial to businesses that need to finance an acquisition. It’s important to note that some banks shy away from these programs because they require special knowledge and expertise. Lincoln Savings Bank has chosen to dedicate resources and be a leader to offer these programs because the financing they provide is often the best, if not the only financing option for some small businesses.
Here are some of the key reasons your business may want to consider an SBA loan to finance an acquisition:
Intangible Assets
If you’re acquiring a company, most businesses have non-physical assets like intellectual property, client lists, customer relationships, processes, and goodwill that are clearly beneficial to the success of the business but have no collateral value. These are difficult to finance with conventional loans.
SBA loans are structured around the cash flow of the business, not the collateral, and have no specific loan-to-value requirements. In recent years, the SBA has removed limits on the amount of intangible assets that can be financed, although there are special rules for amounts greater than $500,000.
Working Capital
Proceeds from an SBA loan can be used for permanent working capital needs to cover things like the start-up of seasonal operations, rapid growth, inventory purchases, payroll and overhead expenses. These items have little or no collateral value, and they are also difficult to finance with short-term lines of credit as they cannot usually be repaid within 12 months. The loan can be structured with a 10-year term to give you ample time to repay the debt, while also accumulating ever-important cash.
Closing Costs
You can roll closing costs into an SBA loan, helping you to retain more cash in your bank account. Maintaining a healthy cash cushion can help provide for a smooth start-up of new operations, weather any unforeseen problems and fund receivables and inventory growth. It’s important to be able to navigate these issues without the unnecessary stress of worrying about making payroll.
Longer Terms
SBA loan repayments can be stretched out for up to 10 years, which provides significant advantages. Longer terms lower the monthly payment and allow for better cash flow. This can be critically important if you encounter a revenue slowdown during a transition period, or if you operate, or are acquiring a seasonal business.
The goal of any loan structure, in addition to the repayment of the debt, should be to support capital accumulation so your business can withstand business cycles, replace worn out or obsolete equipment with minimal borrowings, and have cash to grow without overextending a line of credit. If your business is considering an acquisition, we’d like to help! Contact us through our short online form or call (319) 874-4250 to start the conversation.
