Financing Sources for SME Acquisition

Are you a new entrepreneur looking for financing to acquire a business? Or are you already a business owner in need of a reliable source of funding for your acquisition plans? A combination of different financing sources might be the right solution for you. In this article, we'll explore some key financing options to consider when acquiring a business.

Different Financing Sources:

1. Personal Funds

As an entrepreneur, you should first invest your own money because banks and investors want to see that you're willing to take risks. The amount you contribute can come from savings accounts, investments, or the equity of your home.

2. Bank Loan - Investment Credit

A bank loan is the most affordable source of financing and thus the most chosen option. Prepare well before going to the bank by presenting a clear calculation of your repayment capacity and a detailed business plan with all financing needs. Banks value realistic scenarios more than optimistic predictions.

3. Investors - Venture Capital Providers

Investors provide capital (equity) or subordinated loans. They become co-shareholders and often offer access to a valuable network and market knowledge. Common investors in SMEs include investment companies, informal investors, and family offices.

Consider early in the process whether you want to bring on an external investor, as their involvement can increase the bank's confidence. It's always beneficial to combine multiple financing sources. Read more about this in our article on financing mixes.

4. Subordinated Loan

If bank financing isn't sufficient, a subordinated loan might be a potential source. This is a loan that is "subordinated" and only repaid after other financial obligations are met.

A subordinated loan can help if the total amount can't be fully financed through personal funds and a bank loan. A special form of a subordinated loan is a (partial) payment deferral granted by the seller to help the buyer complete their acquisition financing. This is known as a 'vendor loan'.

5. Earn-out

With a vendor loan, the deferred payment is unconditional, but with an earn-out, part of the purchase price depends on the future performance of the company.

6. Network Loans - Investment Credit

If financing elsewhere is difficult, your own network might provide help. Good agreements on interest and repayment are essential. However, also consider if your relationship can withstand potential setbacks.

A special form of a loan provided by relations of the buyer (or seller) is known as the win-win loan.

(*) Equity occurs when the current market value of the property is higher than the outstanding mortgage loan amount. It represents the positive difference between the property's value and the remaining mortgage debt. This equity can be important when obtaining an additional personal loan with a second mortgage.