Common Challenges of Sourcing Acquisition Financing

Posted on: April 16th, 2018

acquisition financing challengesThe search for acquisition financing is almost always an interesting, and all too often a circuitous one. Due to the multitude of credit channels, each with their unique criteria, an acquirer can spin their wheels and waste valuable time trying to find the right source of lending.

Most borrowers lack the breadth of contacts needed to successfully source on their own. Their local bank contacts may be good for a line of credit or a small term loan, but when the numbers get large, it usually gets beyond their scope.

Additionally, it’s hard to find enough of the right types of lenders for your particular financing need. The rejection rate is quite high, and to ensure you can get at least one interested lender, you have to find 20 to 30 of them.

Information asymmetry also makes it challenging. While there is a lot of information published on the web site of each lender, web based information is somewhat clichéd and superficial.

Lender web sites do not give you a good sense as to the current appetite for loans. They also do not describe the most important credit considerations each lender has.

Moreover, each lender usually has a team consisting of a salesperson and an underwriter. The marketer will tell you things you want to hear and get you excited about the potential for the loan.

However, their influence is limited in the approval process. The underwriter and the credit officer are the ones that make the final decision.

This means it is difficult on several levels to get a good sense of your ability to successfully source acquisition financing. First, you never really know if the lender has real interest.

Secondly, it is hard to get a strong sense of the likelihood of the loan being approved. These factors can create an ambiguous process with hazy visibility for the borrower, and add significant uncertainty to the critical task of getting a loan you can close with.

So what is a borrower to do? Here are four steps that will help you manage a more effective acquisition lender sourcing process, and deliver the capital you need to close your deal.

  1. Learn the basics– Each lending channel has its own credit orientation, and its own specific risk profile within the credit ecosystem. Some channels are only available to private equity buyers, others to independent sponsors.
    All are size & industry segmented. Before you dive into the actual process, educate yourself by researching the industry. It will help you develop an overarching strategy and navigational plan.
  2. Know what type of loan you are– the goal is a loan, but you must learn the industry terminology to be able to properly frame your capital need, in a way that a lender will readily understand it.
    Is it cash flow based, mezzanine loan, or a senior asset based loan with a stretch piece? Each of these loans is supplied by different cohorts of lenders.
  3. Develop a Large Universe of Suitable Lenders – finding the right lender is a numbers game and requires you to touch a large number of prospects.
    Ensure you have a deep list of qualified prospects.
  4. Ensure you have a quality confidential information memorandum– the more professional your presentation, the better your chances.
    Your confidential information memorandum should be clear, well written and tell a compelling growth story.