What are some creative financing options?
Creative financing is normal for today’s business buyer. There are a number of options that you can consider.
- Seller Financing – Increasingly, buyers and lenders are looking to the seller for financing at least part of a transaction. In such a scenario, the seller will hold a note at an agreed upon interest rate for a specific term – generally not longer than five years. The terms of the sale may include a balloon payment at the termination of the loan. It’s a way of giving the buyer time to get up and running and to establish a successful track record with the business. Seller financing of at least a portion of the transaction makes the participating bank more comfortable. Lenders know they have a seller who is confident in the buyer and has a vested interest in the success of the business. There are a number of benefits for business owners who are considering seller financing:
- Faster sale
- Potential Tax Advantages
- SBA Loans – In business sales, conventional bank loans may not be available, so a buyer may want to consider going to a Small Business Administration (SBA) lender, which has a number of loan options. The SBA guarantees a portion of the loan.
- Earnouts – Earnout financing involves a certain dollar amount agreed on by the buyer and seller to be paid to the seller based on the performance of the company after the transaction is completed. Earnouts can be structured in a variety of ways and can be based on different financial benchmarks such as a company’s revenues, gross profits or net income.
- Mezzanine Financing – In mergers and acquisitions, mezzanine financing is another alternative for a buyer looking for capital where the financing package may include higher interest rates. The lenders in this situation are typically high net worth individuals who are expecting a larger return on their investment. They are lending in a junior lien or a position behind the bank and any seller financing. The loans are typically made with limited sources of collateral, thus the request for higher interest rates.
Possible Funding Scenario – Regardless of the funding scenario, a lending institution must evaluate a company’s cash flow and determine if it is adequate to cover their debt service and provide a reasonable return on their investment.
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