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Acquisition Financing
Selecting the sources of debt and equity financing for a potential acquisition is a critical step. Three primary issues to address when structuring an acquisition are: (1) The amount of debt that should be raised; (2) Creating a capital structure that is appropriate for the combined company's future; (3) The cost of funds. In addition to these three deal breaking issues, this white paper also addressed assembling a team that cannot only close the deal but also facilitate the financing and an overview of a successful workplan. If you ever wanted a play-by-play look under the hood of how to conduct successful merger, acquisition or divestiture, THIS is your invitation! If a business is trying to grow through acquisitions, there are many options of financing that will allow the acquisition or merger with another business. Asset Based Lending: Asset based lending plays an important part in financing acquisitions. Clients are provided with cash by lending on collateral (fixed assets, accounts receivable and inventory) and engage in factoring, purchase order financing, real estate financing and leasing.1 Asset based lending can establish a line of credit as high as 80%, based on eligible collateral. There are many types of asset based lending. Some of these are discussed below. Secured Lending: In secured lending, the lender provides funds secured by the borrower’s assets. The collateral can be any asset of value that can be determined such as accounts receivable, real estate, patents, or trademarks. The secured lender can also create a revolving line of credit where the borrower’s collateral is translated into operating cash or working capital Factoring: Factoring is a type of asset based lending in which the financial institution purchases accounts receivable from the lending company. In factoring the lending institution takes on credit risk and collects receivables directly from the business’s customers. Cash Flow Lending: Cash flow lending is an option for firms with predicable and historically sustainable cash flows to obtain financing for acquisitions.2 The lending institution will develop a loan structure that can be serviced with these operating cash flows. The more stable a firm’s cash flows the further the term of the loan can be extended. Cash flow lending can be important for a business during a time for expansion, growth, supplies, or payroll. Cash flow lending is a possibility for any business with a privately held income stream of future payments.4 Cash flow lending has many benefits to lending from a bank similar to asset based lending. For example, a business can receive immediate cash flows while keeping their bank line of credit current and available for emergency situations. [continued...] Want to know more? Download the White Paper "Acquisition Financing" for just $15.95. |
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