Business finance is a specialised area of finance and is completely different to housing and property finance. Most lenders view business assets as marginal from a security point of view so they limit lending to only a small percentage of the total cost of the business. There are no hard and fast rules in business lending. The following is a general list of considerations:
- The length of time the business has been operating
- The amount of financial information available on the business
- The length of the lease and suitability of the premises
- The profitability of the business and it’s ability to service borrowings
- Special skills, plant and equipment required to operate the business
- Your background and experience in relation to the business
- Your assets, liabilities and available cash or equity to be invested in the business
- Working capital and cash reserves
The number one consideration for business lending is the amount of cash or equity you have available to cover the deposit, costs and working capital requirements. This is generally regarded as “Hurt Money” or the amount that you will risk.
Again, there are no hard and fast rules but generally, for a well located and established business lending is normally restricted to 30% to 50% of the purchase price. So to purchase a $600,000 business you may be able to borrow $300,000 (50%) leaving a balance of $300,000 to find. If you have residential property, such as your own home, generally you can use some of the equity you have built up. Possibly up to 80% of the value. If your property is valued at $500,000 – 80% is $400,000. If you have a mortgage on the property of $250,000 then the amount equity you have available is $150,000. This amount plus the business loan ($150,000 + $300,000) totals $450,000 so you would need another $150,000 plus costs and working capital to purchase the 600,000 business. Lets say you have the extra funds required and look at a typical loan structure for the $450,000.
Residential Secured Business Loan
Amount $150,000 (over and above your existing mortgage) Term N/A Structure Interest Only Interest Rate 5.00% (Fixed for the first 3 years) Monthly Repayment $625
Amount $300,000 Term 10 Years Structure Principal and Interest Interest Rate 8.75% (Fixed for the 5 year term) Monthly Repayment $3760
In order to keep the monthly payments to a manageable level we have opted for interest only on the residentially secured loan while the business loan we have locked in at a fixed interest rate for the first 5 years. It may be possible to get an interest only period initially. This would reduce the monthly business loan payments to $2188.
After 3 years the residential loan can be reassessed with the view to start paying back some principal.
If the business enjoys a strong cash flow the term of the business loan may be as short as 5 years ($6192 per month) and the residential loan could be principal and interest over 20 years at $1186 per month.
For an obligation free discussion contact :-
Chris Blake AMFAA Dip Fin Serv
Australian Credit Representative 395833
P: (08) 9315 5410
M: 0418 911642
Please note that this information is of a general nature only. Buyers and Sellers are urged to seek independent financial and legal advice when buying or selling a business.