In modern business, it’s often the entrepreneur who has a better understanding of financing that comes out ahead. There are many types of funding available for business transactions, from equipment purchases to business acquisitions. Bridge loans are a common tool for buying business properties. How good are they for this kind of goal?
Situations When Buyouts Make Sense
There’s nothing predatory about buying out a partner or competitor. Often, this action just makes good financial sense. There are many situations when leveraged buyouts are logical.
When a small business wants to expand into a new market, it has several options for reaching this goal. It could locate real estate, go through the process of hiring employees, build relationships with local clients and gradually build up its profits. Unfortunately, this method is time-consuming and risky, especially when there are several competitors in the area.
A leveraged buyout allows businesses to skip most of these steps. Instead of building a second location from the ground up, it’s easier to simply purchase the assets of a competitor and take advantage of its local reputation and business savvy.
Buyouts also make sense when a company is at the peak of its operating potential permitted by real estate. One option would be to invest in real estate expansion, but it may be more cost-effective simply to purchase another company’s assets. Combining personnel, real estate and equipment in this way can expand production capabilities and profits significantly and smoothly.
Bridge Loans for Leveraged Buyouts
Generally speaking, buyouts always use bridge loans for financing, at least at the beginning. This is because a bridge loan allows purchases to obtain strong outside capital with minimal risks to personal assets.
With a leveraged buyout, the assets and equity of the company being purchased can be considered as collateral to back the loan. This provides excellent funding for business acquisition, and it’s not necessary to have a huge bank account to make the transaction happen.
It’s important to note that bridge loans are short-term financing options. Along with higher interest rates come many benefits for business needs. These advantages are why so many small businesses and corporations alike turn to asset-based lending for large company purchases.
The Advantages of Bridge Loans for Leveraged Buyouts
The first benefit of bridge loans for buyouts is speed. It’s possible to get approved for financing in a period of a few weeks. Acquisitions can be completed quickly, which is usually a plus both for the buyer and the seller. The sooner the transition happens, the sooner businesses can focus on generating increased profits.
Another advantage is flexibility. Conventional purchases need to go through an extensive vetting process. Banks want to know every detail about how loans are used, carefully going over the finances of the applicant’s company and the financial records of the acquired business. This makes negotiations difficult and puts the final decision in the hands of a loan board that doesn’t understand the goals of both parties.
Bridge loans don’t have those requirements. Establishing the as-is value and equity of business assets is important, but the credit rating and other financial conditions of applying businesses aren’t. Even small businesses with imperfect credit or new entrepreneurs can qualify for leveraged buyouts of franchise locations and other companies.
The Bridge Loan Process
Asset-based lending revolves are the loan-to-value ratio. This ratio determines the total funding provided for the as-is value of the assets used for collateral. In the case of buyouts, this ratio isn’t always based on the company’s purchase price. It can look at the company’s equity, inventory, equipment, bank accounts and other assets, as well as any collateral the purchasing business wants to utilize.
LTV ratios vary, sometimes from 70% to 90% for leveraged buyouts. That limits the size of the down payment and investment needed for business owners. The funds obtained can also be used for necessary improvements and upgrades.
Successful Balance Transfers
A common way our customers use asset-based loans is to accelerate closing for buyouts. Business owners simultaneously apply for traditional funding, which takes longer for approval. Once the term loan goes through, the balance is transferred. At HML Solutions, we have a lot of experience with business acquisitions in Florida. Contact our offices to get the funding you need.