How Banks Determine Capacity For Funding

We recently invited Scott McGregor, Commercial Broker at Mortar Finance on a webinar on the topic, ‘Funding your next business acquisition.’ 

Here’s what he said –

Banks are going to look at the capacity, which is effectively the ability to repay the loans. That is what the bank refers to as the Primary Exit, and how the businesses cash flow will afford the loan repayment. 

The bank is going to look at a forecast or some sort of a document of what the future earnings of that is going to be, and the capability of the management to be able to execute on that forecast. It will be important for the bank to understand what assumptions you have made in regards to that forecast.

If you’re buying a business that is complimentary to an existing business, How are you creating synergies between the two businesses? Are there ways that both businesses can leverage off each other? – They are the assumptions that banks are going to want to understand in terms of your forecast as to how that loan is going to be repaid.

The other important factor is the vendor figures. If you are buying an existing business, there will be some vendor information on that and we thoroughly recommend a fairly exhaustive due diligence around that involving your accountant because vendor figures are the vendor’s figures. 

There are add-backs and other things in there that the vendors will confirm them as add-backs, but you need to understand if they add-backs or not, because if they are a general expense of that business ongoing, you need to make sure that the business can afford it. It is always a strong recommendation, and the banks will need to understand what due diligence you’ve done around the vendor figures.

They will provide a guide to future earnings, but it does depend on how you are structuring it. If you’re able to leverage off an existing business that may have an impact on what the forecast looks like in comparison to the vendor figures who may not have had that same leveraged position. If you are acquiring a fairly new business, it may still be developing cash flows and the vendor figures may not have a huge amount of relevance. It is a case by case basis but certainly understanding the vendor figures is key to understanding where the business is going to go.

Watch the full webinar, ‘Funding your next business acquisition’ at https://learning.benwalker.com/courses/fundingbusinessacquisition