Savvy lenders and owners of newly acquired businesses understand the importance of having an adequate amount of working capital available once the new owner begins their new business venture.
What is working capital? If you search for working capital on the internet, you’ll likely find working capital explained as follows:
Working capital is calculated as current assets MINUS current liabilities. Current assets include cash, accounts receivable, and other liquid assets. Current liabilities are financial obligations due within one year, such as short-term debt, accounts payable, and income taxes.
For most business owners, working capital is simply understood to be the cash on hand used to keep a business operational.
When a buyer requests assistance with financing the acquisition of a business through the Loans4Biz program, the need for working capital is addressed at some point in the process of obtaining financing options.
Since the Loans4Biz program involves the participation of a variety of lenders, working capital needs are also addressed in a variety of ways.
The three most common options are:
· Adding working capital to the loan amount needed to acquire the business resulting in a larger loan with monthly payments calculated on the combined loan amount.
· Providing a separate working capital loan with interest-only payments for a period of several years (usually 3-5 years) before regular monthly payments on principal and interest become due.
· Providing a line of credit in addition to the loan amount needed to acquire the business – a line of credit that is adequate to meet the working capital needs of the new owner but accessed for only the amount needed.
A fourth option that is being presented more often is:
· Requiring the buyer/borrower to set up a business account with a minimum balance from their own personal funds equal to 5% of the acquisition price in addition to having 10% of the acquisition price for their equity injection / down payment.
Another way to look at this is that the buyer/borrower may be expected to have 15% of the acquisition price in available funds when acquiring a business rather than only needing 10% of the acquisition price for the down payment*.
Some lenders are still providing working capital in a traditional way but they are now requiring a 15% equity injection / down payment on the acquisition price.
Anyone who is entertaining an acquisition needs to be aware that having 15% of the acquisition price in available funds may become a more common requirement. Of course, having that amount available (as a minimum) has always been a good idea.
Just as every acquisition deal is different, possible deal structure options and financing options are also different and those multiple options are much more likely when more than one lender expresses interest in a deal.
The Loans4Biz (L4B) program was and is designed to provide a buyer/borrower with multiple options.
If you want to have options when searching for a business acquisition loan or learn more about the entire process involved in obtaining financing for a business acquisition, contact Kelly Tivis, Loans4Biz Program Manager, @ 479-770-8989 or via email @ email@example.com.
Kelly has helped dozens of buyers obtain financing for a variety of deals and he is available to assist with your unique deal as well.
*Note that the required 10% is calculated on the total package which includes acquisition price, closing costs, etc.