There comes a time when you want to take your business to a higher level, and so you set the stage for it to grow. This scaling up of your business will allow it to expand and handle increased demand. This phase will require planning and, of course, funding.
To fund the growth of your business, you can sell ownership through shares of stock or accept an infusion of capital or investment from new business partners. Alternatively, you can get a loan or credit, or do some crowdfunding. If you’re a home-based business, sometimes securing a home equity loan or refinancing an existing loan can provide the necessary funding needed to grow.
Once your business is up and running for quite some time, lenders and crowd-funders can take a look at your financial history. They can browse through your internal financial reports, credit reports, or business bank accounts, among other things, in order to decide if they will support the next phase of your business endeavor.
Other ways to grow your business include merging with or acquiring another business. Mergers combine two businesses, and their resources and staff, into a new business. Both businesses will benefit from the new set up, though one might benefit more than the other. On the other hand, while acquisitions also involve two businesses, no new business is born from the transaction. Instead, the acquiring company will fully absorb the company they bought, and sometimes the acquiring company will liquidate the acquired company to grow its business. It’s similar to buying an existing business.
What is Asset-Based Lending Business Acquisition?
You can view an asset-based lending (ABL) business acquisition as a business expansion loan. A business expansion loan is a type of loan given to businesses or individuals who currently own and operate a business. The lender typically requires that the business to be acquired or bought be in operation for a certain number of years before it extends the business expansion loan.
The lender will also assess the ability of the borrower (the buyer of the other business) to run a business profitably. The lender will take these into consideration, along with the borrower’s ability to pay back the loan and other factors, to evaluate the risk of the business expansion loan. When this business expansion loan requires collateral, it becomes an asset-based loan.
So, asset-based lending business acquisition is the process of loaning money, secured with collateral, to a business so that it can buy or acquire another business. The collateral or loan security could be any asset that the borrower owns, including unsold inventory, pending accounts receivables, equipment, land, building, and other real estate and long-term assets. They can even offer their brand name or intellectual property as collateral. These assets come with their own levels of risk, for instance, equipment might depreciate in value or accounts receivables might not be collectable. Because an asset is required to secure the loan, asset-based lending is also known as asset-based financing.
How Does Asset-Based Lending Business Acquisition Work?
As mentioned, asset-based lending business acquisition happens when one business wants to acquire or own another. However, because it doesn’t have enough liquid capital to push through with the acquisition, it borrows money from banks and other financial institutions by putting up an asset as a collateral. Typically, this collateral is the business it plans to acquire or specifically, the assets that the soon-to-be-acquired business possesses. This collateral has tangible value which the lender can seize and liquidate in the event that the borrower defaults on the loan.
The collateral also has risk. Depending on the asset, this risk could be higher or lower based on its liquidity or ability to be converted into cash. For instance, securities are highly liquid assets, while physical assets, not so much. As such, lenders prefer having securities as collateral for an asset-based loan rather than physical assets which are riskier. The lender will consider the level of risk involved to determine how much to issue the borrower, but it may be more than what you’d receive from a cash-flow loan. As for the loan’s interest rate, this will be influenced by how long the borrower’s business has been in operation, the business’ cash flow, and its credit history. However, asset-based loans typically receive lower interest rates than unsecured loans.
With a large acquisition, a third-party accountant, investment bank, or law firm may be called upon to ensure that the loan is properly structured. Once the loan is approved, the borrower must use it for acquiring the business within the allotted time period; otherwise, the borrower can no longer avail of the asset-based loan issued by the lender. And, unlike a line of credit, an asset-based loan is not replenished once the borrower has completed paying it; that is, the borrower can no longer avail of additional funds.
Should Your Business Get an Asset-Based Loan to Fund a Business Acquisition?
Whether or not an asset-based loan is right for your acquisition goals depends on the kind of business you’re operating. In general, asset-based loans will fit businesses that need significant capital, have variations in cash flow but have plenty of assets to put up as collateral. These asset-rich businesses could include retailers, wholesalers, manufacturers, and distributors.
While stable, small and mid-sized companies usually avail of asset-based loans, large corporations may also ask a bank or financial institution for an asset-based loan too. Rather than issuing additional shares or bonds, which is costly and takes a long time, these companies apply for asset-based loans to finance their short-term but time-sensitive needs. Aside from an acquisition, a corporation could use an asset-based loan to replace an operation-critical equipment that unexpectedly broke down.
Asset-based lending business acquisition
But, whether the borrower is a small business or large corporation, these businesses experience fluctuations in sales, commodity prices, or revenues, and through asset-based lending can achieve a level of flexibility to stay competitive. Thanks to its covenant-light structure, asset-based lending offers businesses – large and small alike – more financing but with fewer restrictions. But again, whether asset-based lending is right for your business or not will depend on your business, its needs, current situation, and future plans.