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You're most likely to be approved for a loan with an SBA guarantee. Although this costs a 3% fee, it's much easier than going through the process of applying at multiple banks, etc.
A business must pass a "sensibility test" - - - That is, it must prove that it can produce enough cash flow to succeed, provide income for the purchaser, and pay the payments and other bills (plus about 20%).
Often, when purchasing through a professional broker, a business will be "SBA Pre-Approved" That means that the business has satisfied the SBA that it poduces enough income to both pay the purchaser a reasonable income, PLUS provide enough additional cash flow to make the loan payments
Of course, the purchaser (borrower) must still have a reasonable credit rating.
It is just a hard lending market all the way around. Your best bet would to be to acually go down and just talk with some lenders. Most lenders have their own policies that dictake what they can do and how it can be done. While most of the major stuff like collateral, income and credit will be the same - each will have their own subtleties that could block you.
As stated already - the lender will want to see past income history to see if it can afford the payments (with cushion) as well as high credit on your part (as you will have to personally guarantee). They may also look at the collateral value of the busiuness's assets - if any as most lenders will take a blanket UUC filing on the entire business. Lastly, they will want to know if you have expereince in this industry (or if the current business owner will be staying on for a bit) to ensure that you can continue to generate the same level of income.
I would suggest that you ask the current business owner to hold the note on the business. You come up with a small down payment (say 10%) of the price (price agreed on by both of you) - then amortize the remaining over 25 years with a balloon payment in 5 years. Thus, in five yours, you will have experience and should be able to qualify for a business loan to pay off the note to the current owner.
One quick note - the SBA has reduced its fees to borrowers as part of them trying to stimulate business lending.
Business Money Today
Thanks for the great responses. I will look into SBA loans but a few more questions come to mind.
With the markets changing drastically as far as lending goes, what would classify as a "reasonable" credit rating in lenders eyes? It used to e 620 was acceptable but with all this mess, I'm betting that a 620 in todays market is treated like a 520.
Secondly, I'm looking at a business that is a franchise, it's up for sale for 100k and cash flows 95k. It's been established for 17 years so in my eyes it's pretty stable. Only problem is that I have not owned a business in this industry before, but the franchise is currently ran as absentee. If the manager that handles the day to day operation stays on board after the previous owner leaves in 1-2 months after training me, would this have any effect on a lenders decision or outlook? Also, with these numbers do you think that this is a financable business? Seems pretty good to me but I'm not a lender, just want to get some "bank experience" advice.
Lastly, if I work out something with the owner to pay 10%, could the franchise fee be included or does it have to be paid up front at closing? The seller has already offered to finance 35% of the purchase price, how would this affect getting a loan from a lender? Would it be possible to structure a 100% purchase because the seller is willing to finance so much in the second lien position? Just looking for some insight and advice. Thanks in advance
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I keep hearing people talk about how hard it is to get money to start a business. My question is: Is it difficult to get financing for an already established business? and What's the requirement for a down payment or owner financing? I know the market has changed so I'm just trying to get an update on the requirements for an existing business because I have seen more than enough information about start-up business. Thanks