Business Finance – Small Business Finance – Self Employed Finance
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 x 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.
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This article is for information only and subject to change.