Net Working Capital Line of Credit for Business Showing a Loss

July 15, 2024

by a searcher from Boston University - Questrom School of Business in San Diego, CA, USA

I'm looking at a business, which is an established franchise, that is showing an adjusted EBITDA loss in the prior fiscal year (as well as TTM). Here are some other deal facts:

- The seller is willing to finance most###-###-#### %) of the transaction, with the remaining coming from the buyer.
- The purchase would convey with $600-$700K in NWC, almost all of which is accounts receivable.
- Their collections are coming from insurance carriers so the process is quite slow but there shouldn't be much of the AR that is bad debt.
- The business has a fleet of ~10 trucks which make up the majority of the remaining assets.
- This will be an asset sale.

I am wondering what my options are in terms of securing a LOC for NWC needs? The fact that the business had a loss in its most recent history likely eliminates a lot of the options in a typical SMB deal, like tacking it on with the SBA lender who is supporting the deal. Are there lenders who would be interested in this due to the amount of AR in the business? Thanks for any tips/recommendations!

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

You could do an asset based line of credit or factoring relationship. However, you would need the seller willing to release the A/R if they are self-financing the transaction so you can go and leverage it elsewhere. Without the A/R available, there really won't be an option to get financing. If you can get the A/R released, we could look at some options. We have many asset based lenders we work with. You can reach me here or directly at redacted

Reply by a professional
from University of Colorado at Denver in Denver, CO, USA

Factoring receivables is just one option; a secured loan on the assets is another option with a lower interest rate, most likely. If the seller is willing to finance that much of the transaction, I have had some success adding NWC to the APA using the purchase price as counterweight and earn-out/clawback as a security mechanism for buyer. redacted if you'd like to discuss more.

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