One positive aspect of debtor book financing is that generally it operates like an overdraft and does not need regular repayment of capital. This is because each month the financing is renewed and basically pays off the previous month, so if sales are stable, only the interest is being paid. The issue with this type of financing comes when sales are seasonal, cyclical or going down. What happens is that when the following month's debtor book is lower and is not as much as the previous month there is a shortfall. So the company has to find the cash difference elsewhere to continue operations if costs have stayed the same. However, this type of funding tends to be the first port of call for Buyers as it is easy, less expensive and if discipline is applied, the balance can be slowly reduced over time. However, for the majority of transactions, this type of lending is not enough to make closing payments without significant Buyer capital being introduced to make up the difference. So this is often not a stand-alone solution for the closing payment so to speak but used in conjunction with other lending, most often cash flow lending. Cash Flow/ Term Loans - These are loans based purely on the confidence the lender has that the business will be able to pay back the loan out of profits. The rule of thumb is that a lender will lend up to 2.5x normalised EBTIDA generally over 5-6 year period with capital and interest being paid back as part of the payment plan. The interest rates tend to be quite high, but when taken in the context of the very high returns of owning a business, many Buyers will conclude it to be a worthwhile mechanism for getting a business they want to acquire over the line. Many lenders will offer a ‘bullet’ payment on a large portion of the capital portion of the loan (i.e. 30%- 50%) payable at the end with only interest due during the term on that portion. This can be exceptionally helpful for cash flow and the bullet is generally simply refinanced at the end of the loan term.
88
Made with FlippingBook - professional solution for displaying marketing and sales documents online