Financing Inventory-heavy Businesses

April 23, 2021

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Hello all — I’ve been looking (very preliminarily) at two inventory-heavy businesses, one of which is a seller of imported flooring materials to commercial contractors, and the other is a classic car dealership. I'm trying to get a sense of two things related to financing as I try and evaluate the deals and put financial models together. I'm self-funded and not planning on taking on investors, and the idea has been to use an SBA loan and seller financing for ~90% of the total purchase price and a 401k rollover for 10% (obviously adjusted based on whatever the banks end up requiring).

1) Would the inventory be financed through the SBA loan or is there a different product that's better-suited (line of credit or similar)? I'm trying to get a sense of how I should be thinking about the debt service costs.

2) The current value of the inventory is not far off of the purchase price of each business. I'm wondering about how to think about what I can get financed. Should I be thinking about my theoretical upper limit for an acquisition (based on 90% debt) with or without the inventory? For example, let's say I have $1 for the down payment. Does that mean my upper limit is a business priced at $10 including the inventory, or excluding it?

Thanks very much for any thoughts/assistance.

Reply by a searcher
from Georgetown University in Chicago, IL, USA

1. Limited experience w/ SBA lending but have worked with a distribution business in the past that was backed by an Asset Backed Loan. Pricing is usually pretty similar to a normal cash flow loan, biggest difference being a more active revolver/line of credit (for working capital). As I mentioned, limited experience (was a project I jumped into at the tail end), so unfortunately that is about all the detail I can give on the subject unfortunately.
2. I do know from an underwriting standpoint ABLs look at some discounted value of the inventory.

Reply by a searcher
from Northwestern University in Seattle, WA, USA

I see this post is from 2 years ago, wondering if you would be willing to connect on how it actually played out and what you learned. Also in preliminary stage of searching, found a company that is promising, marketed as 3.5x SDE, but purchase price doesn't include $1M of inventory which is essentially 33% of the purchase price. Not sure how to model out from financing standpoint.

+3 more replies.

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