Equipment and Receivable Financing for Acquisition

July 28, 2022

by a searcher from Duke University in Tulsa, OK, USA

Hello, I am looking at an opportunity right now that has a significant amount of equipment ($2.1 million) and accounts receivable ($2.9 million) relative to the business value. The sellers are open to a significant amount of seller financing such that it would be realistic to acquire the business without SBA.

What banks would specialize in equipment loans (no personal guarantee) and Line of Credit against receivables that I can reach out to?

I envision financing the transaction with equity around 10%, seller financing###-###-#### %), equipment loan and a line of credit against receivables in such a way as to avoid a personal guarantee. Is this realistic for a first time acquisition?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

There are a range of bank and non-bank lenders out there that will look to structure acquisitions via conventional debt versus SBA. However, most are going to require a personal guarantee from the primary owners unless the collateral and cash flow well exceeds normalized levels (loan to values 50% and below and debt service coverage ratios of typically of 2x's or higher to have a chance at non-recourse). We do have some lenders that will look at limited recourse and some equipment lenders that will consider non-recourse debt, but again the majority of lenders are still going to require recourse unless the above conditions are met or the sponsor is a strong fund, in which case they would look for a corporate guarantee from the fund.

As for structure, equipment lenders are typically going to advance 75% to 80% on the "orderly liquidation value" or "forced liquidation value" via an equipment appraisal. This typically means the advance is going to be significantly below the market value of the equipment. For account receivable financing you can typically see 70% to 90% financing depending on the quality and strength of the accounts receivable with 80% being more the norm. However, that financing is only going to allow advances against current receivables (typically aged 90 days or less) with cross-aging taking place. In addition, most lenders are not going to want to advance fully against receivables on day 1. They are going to want to leave some dry powder and not be fully advanced leaving availability to fund future working capital needs of the business.

If you can achieve the acquisition between seller debt, some equity, and advancing on collateral, then you can do the deal without an SBA guarantee so long as there is enough collateral. I would be more than happy to discuss your specific situation at any time. We have over 350+ funding partners and do a substantial amount of business acquisition financing, both SBA and non-sba. I can be reached at any time at redacted

Reply by a searcher
in Winston-Salem, NC, USA

Agreed with everything in the above 2 comments. I don't want to say accomplishing this without a personal guarantee is impsosible but in my opinion it's unlikely and could force you into less flexible terms with factoring companies. (If you're required to pay them back upon receiving your receivables will limit how much cash you can keep in the business to cover operating expenses). On the equipment, I have found that if it is not new, you are going to get a much lower valuation than expected (like previous poster said valued against liquidation value vs. replacement value).

My take would be get as much seller financing as possible and then structure youre other financing so that you have liquidity and time to make payments - if the personal guarantee feels too risky then the financing is not structured correctly.

Just my 2 cents.

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