List of lenders who make inventory loans

January 08, 2020

by an investor from University of California, Berkeley - Haas School of Business in San Francisco Bay Area, CA, USA

I'm looking at a $16M revenue / $2M EBITDA medical device distributor with $5.5M in inventory. The inventory consists of both new products and refurbished products (which the company refurbishes themselves and then resells at a high margin). The business is very stable but has no revenue growth. The inventory is required to run the business and cannot be significantly reduced.

Question 1: I'm looking for advice how to use the inventory as collateral for an acquisition loan. Does anybody have a list of lenders who will lend on the inventory assets (without a personal guarantee)? What is a good ballpark estimate for the amount of debt financing I might get on $5.5M of inventory and what are typical interest rates?

Question 2: How would you value a business like this? It it running at $2M EBITDA but has flat revenues over the past 5 years and $5.5M in inventory.

Appreciate your thoughts!

Reply by a searcher
from Carleton University in Calgary, AB, Canada

Lots of great questions. On valuation, I would personally value this type of business in the $8M range, but I've seen some medical/healthcare businesses go for significantly more as there is a lot of consolidation in this space. It would depend on how unique their products and/or distribution rights are.

On debt, few lenders will lend on inventory alone. I know some who will, but they tend to be very expensive. Instead, lenders will look to A/R or cash flows first, then use inventory as a secondary measure. For example, I know several lenders who will lend up to 60-65% of inventory value, but this amount is also capped at 50% of the lending based on A/R (so unless your A/R is huge, you never actually get up to 60-65% of inventory).

To get more specific and/or to suggest lenders I'd need to know some more details. Feel free to email me directly - redacted

Reply by a lender
from University of Missouri in St. Louis, MO, USA

if you have the cash flow we can lend against inventory (and A/R) without a PG. Issue likely will be a $2M EBITDA will command well north of what you can finance on the inventory. Even if a field exam showed a good liquidation value, you would probably cap out at 50-60% on the inventory. That would only get you in the ballpark of $2M-$3M and leaves you zero room for working capital post close. Even a flat business with that kind of EBITDA and assets will likely be looking for $8M-$10M+ (best guess). So you could really only get about 20-30% of the purchase price on the WC assets. The rest would need top be made up in equity/seller debt.

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