Finance buying a company is among the most crucial decisions you’ll make as a borrower, and they must be aware of the huge difference between purchasing the business and purchasing the house. In general, banks are seeking two things: security (something they could use as a safeguard should things happen to them) and the ability to service (the capacity to repay the loan within a set timeframe)
Before making an offer for financing, the bank should be aware of its risks. This is where security and serviceability are crucial.
Let’s take a look at each of the items in greater detail.
Security:
The primary choice of banks for security methods could be commercial or residential property. According to the general rule, they’ll give 80% of the money for the residential loan and 70% for a commercial loan. However, it is important to keep in mind that this is merely a guideline. If the loan was a good deal that checked off a number of boxes, the bank might go up completely or even dollar for dollar as it is called. In these cases, the part beyond the normal percent is typical to be paid off within shorter periods of time, which will obviously impact the flow of cash and has to be taken into account.
Equipment and plant are a good security option; however, you must check with the bank to determine what options are available for you, as it is the basis of a case-by-case basis. Certain clients also make cash deposits. This option is useful if you have two or more people who do not want to tie all their properties.
Serviceability:
All banks use calculators to determine if you are able to pay back the loan within the agreed-upon timeframe. When they do this, they will take into account all your earnings, including those from other sources other than the business you’re trying to buy as well as any earnings from your spouse. This is then input into the calculator, along with your total commitments.
Two clients may examine the same business, and one could be accepted while the other would be rejected as their circumstances might be different.
If you’re in the middle of a large number of short-term loans and large credit card limits, then this could be a problem as your information is entered into the calculation of serviceability. Be aware that income earned by your spouse may assist you.
An excellent illustration of this is of a former client that I helped get an enterprise loan. The application was rejected by the bank based on the basis of serviceability because they didn’t ask about the income of his spouse, and he was unaware that this could affect the loan application, and he never even thought about it. After obtaining all relevant information from him, it was clear that the loan could actually serve, so we presented it to a different bank, and it was approved, and he proceeded to buy his business.
Risk:
A well-written business plan can help make a huge difference to your application with regard to acceptance and pricing. Things in your business plan must include your background, in terms of what you can add to the company as well as your background in business and any changes you might bring to the company, as well as a cash flow statement that shows funds flowing through the company and the future viability. The more effort you invest in your business, the more you’ll be able to achieve! The above are all things we offer our clients every day.
