Let's be honest . . . Financing a business acquisition is a lot harder than it used to be.
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Commercial lending has come under scrutiny following the bank debacle and bailout rounds that occurred in 2008 and 2009. Commercial lenders are leery of funding acquisitions and startups unless they meet strict borrowing criteria and can prove that they have a better than average chance of success.
But although it's more difficult to get a business acquisition loan, it's not impossible. Banks and commercial lenders continue to finance acquisitions that meet their lending standards, including many small businesses that are being purchased by first-time entrepreneurs.
These days, the key to business acquisition financing is making it easy for lenders to approve your request. That means learning how to put your best foot forward with lenders. There are a lot of bases that need to be covered, but here are a few things we suggest to increase the likelihood of business acquisition financing.
- Push the issue of valuation. In general, lenders are much more open to financing assets than they are the intangible value of a business. The underlying reason for that is because it's easier to value tangible assets they can hold as collateral against the loan. So for lending purposes, lenders will likely want to use an asset-based valuation method. To increase the amount financed, try to push for a different valuation method that takes into account other assets like the brand or a well-trafficked company website.
- Minimize risk. Businesses that are situated in inherently risky industries are like kryptonite to lenders. Sometimes the best way to improve the odds of obtaining acquisition financing is to choose a business in a less risky industry. For example, although you might think the acquisition of a thoroughbred racing stable sounds like fun, you'll have more luck if you buy the only feed supply company in a three county area.
- Maintain good credit. Credit ratings count when it comes to business acquisition financing. Any companies that you have previously owned will be evaluated according to standard credit rating criteria. As the owner, your personal credit history will also be evaluated as part of the lending decision.
- Time the market. Market and economic trends make a difference with lenders. If the business you want to buy is currently in the midst of a downward industry trend, your lenders will know it and will be less open to financing an acquisition. Sometimes a rejected loan request isn't really a "no" – it' a "not now" that could be reversed when the industry rebounds.