Business Finance
There is variety of financing sources for business acquisition loans that is suitable to fill the requirement in fulfilling the business acquisition or business financing on either short or long run. And for many businesses, there are always available financing routes (West, 2007).
Buyer’s Personal Equity
This is the beginning of most business acquisition situations. The 20-50 percent of needed capital or additional capital came from buyer and his or her family. An individual should decide how much capital because it is risky and it varies on the nature of business and terms of sale. In partnership, each are obliges to contribute either money or skills and talents as their capital. One of the major reasons of personal equity financing is a good starting point is that buyers who invest their own capital can positively influence other possible investors or lenders to participate.
Seller Financing
Simplest and best ways to finance a business is to work hand-in-hand with the seller. The seller is the best source for a business acquisition loan and his or her own willingness to participate. The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third-party lender. They typically finance 30-50 percent or more with an interest rate below current bank rates and with a far longer amortization. The seller financing can make the business more attractive and viable to other lenders. And sometimes, big financers refuse to participate not unless there is a large number of sellers financing is already in place.
Venture Capital
This kind of capitalists has become more eager players in the financing of independent businesses. Indeed, they are known for chasing after the high-risk, high-profile brand-new business and becoming increasingly interested in established, existing entities. The professional venture capitalists will likely want the majority to control and will expect to make at least 30 percent annual rate of return on their investment.
Small Business Administration
The Small Business Administration Loan Guarantee Program is favorable in financing terms that are available to business buyers. It is quite similar to the seller financing and SBA loans has a long amortization periods, like ten years, and can provide up to 70 percent of loans. The seekers of loans must prove the stability of the business and must also be prepared to offer collateral-machinery, equipment or real estate, and the evidence of a healthy cash flow to insure the loan payments. As a result of this approach, more banks are now being approved as SBA lenders and become more in tune with small business financing.
Lending Institutions
Banks and other lending agencies provide unsecured loans with cash available for servicing the debt. The seeking bank loan will have an advantage if they have a large net worth, liquid assets, or a reliable source of income. Unsecured loan are also easier to come by if the buyer is already a favored customer or one qualifying for the SBA loan program. Participating banks typically finance 50-75 percent of the real estate value, 75-90 percent of new equipment value, or 50 percent of inventory. The accounts receivable, as an intangible asset, are also finance from 80-90 percent. Although it may sound attractive, most business buyers are unwise to look toward conventional lending institutions to finance their acquisition.
Existing Business
Usually when an existing business aims to provide broad project, like expansion or franchising, the business’s utilized their own fund to gain additional capital. The funds that they use are called revolving funds in which the firm keeps their earnings. By nature, the revolving funds are expected to finance at least a material part of their cost by selling goods and services in a continuing cycle of a business-type activity (Chapin, 1996). A business should create this type of fund in case they are planning for future expenditure for the business.
In addition, a business that cannot provide sufficient fund for the planned business growth, expansion, or acquisition of materials, an initial debt is the part of solution in filling the initial equity. A summary of lending institutions such as banks, saving and loans; and credit unions can be considered as part of the business’s total initial debt. Studies suggest that the acquisition of capital by small businesses in initial financing is commonly a mixture of personal equity and bank borrowing (Auken and Carter, 1989).
Conclusion
The level of initial capitalization in a small business has a significant impact on its success. The undercapitalization is one of the major causes of failure. Therefore, a small business’s success is also affected by the composition of initial capital, like the difference between the debt and owner’s equity (Auken and Carter, 1989). Too much debt leads to liquidity problems, especially during the first year when high start-up expenses and low revenue are common.
References:
Auken, H., & Carter, R., 1989 [Retrieved 2002]. Acquisition of Capital by Small Business. Journal of Small Business Management
Chapin, D., et al., 1996. Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting. Statement of Recommend Accounting Standards. [Online] Available at: http://www.fasab.gov/pdffiles/sffas-7.pdf. [Accessed 12 Nov 2009].
West, T., 2007. Financing the Business Acquisition. The Business Broker. [Online] Available at: www.businessbookpress.com/articles/article144.htm. [Accessed 12 Nov 2009].
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