An acquisition loanis a loan given to a company to purchase another business or a specific asset. Typically, an acquisition loan is available for a short window of time, and funds available through an acquisition loan, once repaid, cannot be borrowed again as with a revolving line of credit.
The need for business acquisition loans
Companies use business acquisition loans primarily to acquire a business, or to refinance an existing business. The most common uses of acquisition loans are to buy a business to vertically integrate or to accelerate growth in a new region. Often it is more cost effective for a business owner to acquire an existing business than to start a new business from scratch.
Common sources of business acquisition loans
The common sources of business acquisition loans include bank financing, seller financing, equity financing, asset-based financing and unitranche financing. For small and mid-sized businesses the Enterprise Finance Guarantee (EFG) scheme, run by the Department for Business Innovation and Skills, offers business acquisition loans to businesses whose turnover is less than £41 million with loan amounts varying in size from £1,000 to £1million. Some business also seek venture capital funds or angel investors to fund theiracquisition loans.
Mezzanine financing- a smart alternative to traditional business loans
Mezzanine financing is fast emerging as a smart alternative to traditional business acquisition loans. Although in its initial stages of conception, mezzanine financing was only available to high-end borrowers, they are increasing becoming available to small and mid-sized businesses, with several mezzanine lenders in the UK offering loans in the less than £10 million sector.
Described by financial experts as a ‘hybrid’ or ‘halfway house’, mezzanine loans combine elements of both debt and equity funding, making it an attractive source of funding to small business owners who don’t want to give up too much equity. A mezzanine loan usually takes a very small amount in equity- usually about 3% to 5%, thereby allowing business owners to keep their decision-making rights. Furthermore, mezzanine loans offer more flexibility in coupon structure, terms, and amortization than banks and senior debt providers. Also with a mezzanine loan, a company can raise its total debt to three to four times its cash flow as when compared to senior secured debt, resulting in a higher amount of funding. Typically, a mezzanine deal lasts for 5 to 7 yearswith most successful mezzanine deals resulting in an exit in year 3 or year 4, either through a refinancing or a recapitalization of the company.
Attract Capital, a corporate finance advisory firm, can help you with your business acquisition loan needs. With 24 years of funding acquisitions, we can provide quick sourcing solutions for acquisition funding needs.