A consultancy that handles lettings agency acquisition says funding options exist for companies wishing to buy others, despite rising interest rates.

Lucy Noonan, founder of Atomic Consultancy, insists that there are plenty of viable funding options available and healthy profits waiting to be made with the right purchase – although she concedes that last month’s Bank of England hike in base rate from 4.25 to 4.5 per cent “understandably sent a ripple of apprehension through the property sector and planted a seed of doubt in anyone looking to buy or sell an estate or lettings agency in the near future.”

She says these options are available to companies on the acquisition trail:

Commercial Lending – “Many clients are still choosing the traditional route to raise funds. Higher interest rates mean that commercial lending is more expensive, but it’s not a reason to be put off. An acquisition will likely bring significant economies of scale, enabling the buyer to vastly increase the value of a business and the profits it makes simply by acquiring it and integrating it into another business. Integrating two businesses enables the consolidation of management time, accounts, supplier contracts, and marketing to save costs and add real value. 

“It’s worth bearing in mind, however, that some banks can be reluctant to lend in the current environment, especially where estate agencies are concerned. They are more minded to support lettings agencies due to the predictability and consistency of the portfolio income.

“Another factor to consider is whether to get a secured or unsecured loan. A secured loan involves providing an asset that the lender can take if payments can’t be maintained – a risk that needs careful consideration. That said, providing an asset decreases the bank’s risk, making it more likely that they will provide the funding, and do so at a lower interest rate with longer repayment terms.

“An unsecured loan increases the risk for the lender, generally resulting in more interest and higher borrowing fees. The business owner might also need to give the bank a personal guarantee, making them personally liable to repay the loan if their business fails to do so. There is an upper limit of £250,000 for most unsecured bank loans, making them unsuitable for larger acquisitions.” 

–

Equity Funding – “Many clients are choosing Equity Funding, raising money for acquisitions by giving away a percentage of equity in their business. There are definitely advantages to equity funding, including securing funds for a business if it can’t demonstrate the necessary revenues or financial history to secure a bank loan. Another advantage is that equity investors are often well-connected through their previous investments and experience. They are already fully invested in the acquired business’ profits and are therefore likely to share their contacts and knowledge to help that business grow. 

“Giving away a percentage of equity can of course be off-putting to many business owners, but equity funding allows business owners to invest at pace, more frequently, and with greater ambition. A good funding partner will be supportive, helping grow a successful business and funding its acquisitions. There are no costly repayments to make, and the business can grow at a faster rate.” 

Crowdfunding  – “Crowdfunding is a way to raise funds by collecting money from a large number of people through dedicated online platforms. Though most often the choice of start-ups, it is also used as a way to access alternative funds. Crowdfunding platforms enable fundraisers and the crowd to interact in order to acquire financial pledges. 

“There are numerous ways to approach crowdfunding, including peer-to-peer lending, a rewards basis (the offering of a non-financial reward such as goods and services to funders), profit-sharing / revenue-sharing, equity crowdfunding (giving away a share of a business to investors), and debt-securities crowdfunding. Business owners need to do their research and choose the model which is right for them. It’s certainly not for everyone, but Atomic have seen it work with some success in the past.” 

–

Funding Circle – “Funding Circle started up in the aftermath of the 2008 financial crisis, when small businesses struggled to acquire loans from the reeling financial industry. Their model is to link funders and investors online and make quick decisions on loan applications. Funding Circle are far more open to risk than a commercial lender, and charge a one-off completion fee to borrowers when they take out a loan. That fee is typically 3 – 5% of the amount borrowed.”