Your Guide to Business Loans & Financing Solutions

Your Guide to Business Loans & Financing Solutions

Corporate growth opportunities like mergers, inventory investments, equipment upgrades, team expansion and commercial real estate all require capital that, in many cases, a business will not have upfront. 

Businesses need funds to grow. Business financing solutions exist to help companies and investors in good financial standing to access the funds they need to take advantage of growth opportunities. Ideally, this growth expansion will increase revenue that the business can use to pay back the financing while still generating profit. 

With the right resources, you can expand and grow a business. You just need to identify the right financing or loan option to set your business up for success. 

At Beacon Advisors, we offer debt financing solutions and services to help business buyers and owners obtain the financing they need to achieve their entrepreneurial goals. Get in touch with our Toronto business brokerage to learn more about what debt financial solutions we can provide for you. 

Understanding Your Business Financing & Loan Options 

There are various avenues that an eligible business or business buyer can take to obtain the financing they need to grow or invest. We offer buy-side transaction advisory services to help business buyers make smart business investments.

Learn about the business loans and financing solutions that can help you set your business up for a bright future.

Business Financing For Business Owners

Businesses need to spend money to make money. With these financing options, you can obtain the funds you need to grow and generate future profit.

Consider the different business financing options that can help you set your business up for future success:

Inventory Financing

What is inventory financing?

Inventory financing is a type of short-term loan arrangement where, like a line of credit, a company purchases inventory on credit to generate sales. This type of agreement is best suited to businesses that need immediate short-term liquidity.

Using inventory financing

A business will use inventory financing when their payables are due sooner than they can collect receivables from customers. The inventory in this situation is used as collateral. 

If the business cannot generate sales or fails to pay back the loan, the inventory is seized and liquidated by the creditor. In other cases, inventory financing can help businesses acquire additional inventory and provide liquidity when they experience seasonal cash flow fluctuations.

Secured Loan

What is a secured loan?

A secured loan is a loan backed by an asset commonly known as collateral. If a business defaults, the creditor will seize the collateral asset and liquidate it to ensure that they receive payment.  

For example, a lender may offer a business owner $40,000 and ask the owner to secure this loan against the business vehicle worth $40,000. If the owner defaults on their payment, the lender will take possession of the business vehicle.

Using a secured loan

A secured loan can be backed by a personal guarantee, debentures, mortgages or general security agreements. It offers higher security to a lender, has a lower interest rate, and can be a good financing option for businesses with a strong balance sheet and cash flow. 

Business owners and management teams can build their debt schedules to forecast interest payments and cash flow to assess default risk before levering the business. If the company has a healthy interest coverage ratio, large cash buffer and strong track record, company management may consider this type of loan as an option.

Senior Debt

What is senior debt?

Senior debt refers to debt that has a higher ranking in the capital structure. In the event of a default, lenders get repayments before junior/unsecured debt holders, as well as equity investors.

Using senior debt

This debt is secured by collateral, which means that it has lower interest rates than subordinated debt.

Bridge Loans

What is a bridge loan?

A bridge loan is a type of short-term loan provided to an entity before arranging long-term financing. This loan is typically provided for less than a year. While bridge loans have a faster application, approval, and funding process, they have higher interest rates and usually require collateral.

Using a bridge loan

Such loans are a good option for businesses with short term liquidity or immediate capital expenditure needs. These arrangements allow businesses to use the equity in their existing assets as a down payment on loans for new acquisitions.

Convertible Loans

What is a convertible loan?

A convertible loan is a hybrid loan that combines features of both debt and equity. These bonds give creditors the option to convert loans into equity at certain periods after bond issuance. They are unsecured and usually have lower interest rates.

Using a convertible loan

Lenders are generally more willing to issue convertible loans when a company has a strong prospect for growth.

Financing Options For Business Buyers

Business buyers, like business owners, are looking for an entrepreneurial opportunity to grow revenue and scope. In the case of a business buyer, finances may need to be secured to invest in the right business.

The good news is that there are financing options available for business buyers looking to obtain funds to buy a business:

Vendor Take Backs

What is a vendor take-back?

A vendor take-back agreement, also known as a VTB, is an arrangement where the seller acts as a lender to the buyer to facilitate a purchase. The buyer will sign a vendor take-back note promising to pay off the loan in periodic installments over a specific time frame. The seller may agree to charge no interest unless the buyer defaults on the agreement.

Vendor take-backs can be secured or unsecured and generally subordinate to senior debt, making it riskier. Vendors take-back benefits because the buyer acquires cheap financing, and the seller can move the property off their books.  

Using a vendor take-back

VTBs are common when a business does not have enough tangible assets to secure a senior debt. This financing option is also used when a company has a higher risk or uncertainty associated with it. This uncertainty could be because of a bad year due to the loss of a significant client or the absence of a proven track record altogether. 

 Before entering this agreement, sellers must take precautions to protect themselves in the event of a default. Sellers are often hesitant to take on this added risk without adequate rewards. Still, it is important to note that this agreement helps attract the right buyers and increases the sale’s chances of going through.

 

Acquisition Financing

What is acquisition financing?

Acquisition financing refers to the process of obtaining funds to buy a business. Smaller acquisitions can be financed through a line of credit or bank loan. Most banks and lenders also offer non-recurring acquisition loans with lower interest rates. 

Depending on the size of the acquisition, one or more loans might be required from multiple lenders. These loans are often collateralized against the business’ tangible assets.

 

Special Provisions For Business Financing

There are special cases when an individual acquiring, merging, or expanding a business may require financing to close a deal. 

There is often a gap between the seller’s asking price versus the amount a buyer is willing to pay for it in most business acquisition scenarios. Sellers tend to be optimistic about their business’s future growth; however, a buyer will be cautious in assuming such forecasts of future profitability.

Earnouts are a way of bridging this gap between what a buyer is willing to pay and what a seller believes the business is worth.

What Is An Earnout?

The limitation with earnouts is that, when new management steps in, they could make operational changes resulting in the company not achieving the earnout targets. Additionally, when the acquisition is strategic, and the buyer integrates the target’s operations with its own, it is challenging to measure whether the growth was due to the buyer or synergies from the acquisition

As a result, earnouts can get incredibly complex. Sellers must carefully examine all earnout terms to make sure that they are measurable and realistic. For this purpose, sellers often consult professional M&A advisors and legal counsel.

Contingent consideration is recognized at fair market value as of the transaction closing date. It can be calculated using a probability-based model, which depends on the likelihood of specific scenarios and the risk-reward structure associated with those scenarios. Earnouts with a threshold and cap can also be valued using an option pricing model.

Using An Earnout

The limitation with earnouts is that, when new management steps in, it could make operational changes, resulting in the company not achieving the earnout targets. Additionally, when the acquisition is strategic, and the buyer integrates the target’s operations with its own, it is difficult to measure whether the growth was due to the buyer or synergies from the acquisition

As a result, earnouts can get incredibly complex. Sellers must carefully examine all earnout terms to make sure that they are measurable and realistic. For this purpose, sellers often consult professional M&A advisors and legal counsel.

Contingent consideration is recognized at fair market value as of the transaction closing date. It can be calculated using a probability-based model, which depends on the likelihood of certain scenarios and the risk-reward structure associated with those scenarios. Earnouts with a threshold and cap can also be valued using an option pricing model.

What You Need to Secure Business Financing

To secure financing, a business may need to present their current financial standing, or a business owner may need to present personal finances to indicate their ability to repay a loan and successfully run a business.

The Value Of Your Business

 

A business owner may require a business valuation to value their business to present the information to help a creditor make their decision.  

 

 

 

 

What Assets Can Your Business Use as Collateral?

In the context of a business loan, a company can use its business assets as collateral to receive a secured loan at a favorable interest rate. Creditors prefer assets that are easy and inexpensive to liquidate. Additionally, they will pay the borrower less than the asset’s market value to compensate themselves for any loss in value incurred due to the urgent need for liquidation. Consequently, a liquid asset with low volatility will make good collateral. 

Inventory is generally a good collateral asset as it can be easily liquidated and will not cripple operations. Some other examples of collateral assets include: 

  • Equipment
  • Machinery
  • Vehicles
  • Investments
  • Leasehold
  • Property & Leasehold
  • Fine art 
  • Jewelry

Choosing The Right Lender

Beacon Advisors is prepared to help you with all of your business financing needs. We offer debt financing solutions for both business owners and buyers and walk you through every step of the process.

 

 

 

Contact Beacon Advisors today to book a consultation, and we will walk you through all of your options and help you choose the right one for your needs.

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