There are many ways to cover the costs of a business acquisition. One that few owners consider is asset-backed financing.
Many banks and credit unions offer asset-backed loans to people willing to leverage their new or current business’s assets. Often, business buyers will finance their inventory, machinery, non-mortgaged real estate, or other tangible assets to access this fast form of funding.
Why would I choose this approach over another form of financing?
You might consider an asset-backed loan to cover the costs of an acquisition in any of these circumstances:
- You’ll need more capital than what you can attain from other sources.
- You don’t qualify for a traditional term loan.
- You don’t want to put up personal assets as collateral for financing.
- The business you’re buying—or the business you already own—has assets you could leverage to achieve your funding goals.
It’s often easier to meet lenders’ requirements for asset-backed loans than for traditional term loans. Many will consider your financial history and personal creditworthiness. But often, they’re far more interested in the value of your business assets, which they can use as collateral if you default on the loan.
How does this kind of loan work?
Lenders will determine how much money you can borrow by studying the value of your assets. Often, they allow owners to borrow up to 85% of the value of their accounts receivable and up to 50% of the value of their inventory or equipment. Depending on your preference, the lender can offer you a revolving line of credit or structure a loan for an amount equal to those percentages.
Could I lose the assets that I put up for collateral?
Yes. If you default, the lender can seize those assets, liquidate them, and use the proceeds to cover their losses.
Collateral provides a safety net for lenders. Because of this, banks often consider asset-backed loans to be lower-risk investments. Many are more willing to provide this loanؙ than term loans.
How do I apply for an asset-backed loan?
To start, you’ll need to find out which banks and credit unions in your area offer this form of financing. You can also look to online banks, including GoKapital and Commercial Loan Direct, to explore lending options. When reaching out, ask about their payment plans, terms, and the speed of their approval process to learn who can meet your needs.
Next, you’ll gather the documents lenders needs to process your application. These documents will probably include:
- Each business’s balance sheets for the past two years, plus a year-to-date balance sheet
- Each business’s profit-and-loss statements for the last two years and a year-to-date profit-and-loss statement
- The sales projections of the business you plan to buy over the next three to five years
- Business and personal tax returns for the past three years
- Personal banking statements for the past 12 months
.
Then, you’ll need to create a list of your assets and record their values. If you’re leveraging inventory, plan to provide an inventory statement with a count of the items and each item’s approximate (or appraised) value. If you plan to leverage equipment or machinery, provide each item’s age, condition, and resale value.
You’ll submit these documents and a completed loan application to the lender. The lender will ensure that there are no outstanding liens on your assets by performing a Uniform Commercial Code search. They may also have your financials audited by a third-party firm while they review the other parts of your application.
After an initial review, most lenders will ask for a preliminary commitment to continue the loan process. They may give you a non-binding offer with the loan amount, interest rate, and terms they believe they can provide. To move forward with the process, you’ll sign a term sheet and, in some cases, pay a due diligence fee for the bank to conduct the rest of its review. Then, the bank will audit the documents you provided and conduct an in-person assessment of the items that will serve as collateral.
If you’re approved for the loan, you’ll receive closing documents. Within days of signing and submitting these documents, you should receive the financing you requested.
Important note: Lenders who offer asset-backed loans may perform periodic checks on your assets to verify their value. These checks can occur at any time throughout the tenure of your loan.
.
Not sure if this form of financing is right for you? Learn about term loans, SBA 7(a) loans, seller financing, and other options to attain the capital you need in this guide:
What’s next?
Log into your owner’s portal for more articles and advice you can use as you complete your purchase and begin operating your new business.
