Banking Crisis Edition

Some Buyers may have all the cash they need to purchase a business. Many get home equity loans. Others have other assets such as IRAs or 401Ks that they can borrow against. Some turn to Banks.

Banks can be difficult institutions to work with because they are subject to many Federal and State regulations. They lend money based on what collateral you are willing to provide and the inherent risk that they see in the deal. Their preferred collateral is real estate, but some banks lend on equipment or some on quickly salable inventory. Banks usually do not like to finance certain businesses such as Restaurants, Bars, Clubs, Gas Stations, C-Stores, Deli's, Beauty Salons, any type of start up and any type of cash business. That's a very long list of dislikes that encompasses a vast sector of the Business Brokerage market. Fortunately, there are many excellent alternatives.


Owner Financing:

Many small businesses are sold with the seller financing a portion of the selling price. When the seller offers financing, the final sale price is often higher because the buyer has more confidence in the viability of the business and the integrity of the seller. Due to their personal requirements, not all Sellers can offer financing.


Secondary Financing:

There are many excellent sources of non bank financing at competitive rates. These include Finance Companies, Hedge Funds, Mutual Funds, Factors and private investors. You can even get financing based on your credit card sales. Despite what you read in the news about the banking crisis, there are plenty of funds available to finance any legitimate business acquisition.


Tertiary Financing:

Hard money lenders are companies or individuals who finance deals that do not conform to traditional banking requirements. These loans are normally collateralized with Real Estate. They are much more expensive then bank loans because they are not based upon traditional credit requirements which protect these lenders from the high default rates they experience.


P2P Lending:

Person-to-Person lending, also known as Peer-to-Peer Lending and Social Lending is the name given financial transactions which occurs directly between individuals without the participation of a traditional financial institution. Internet based social networked person-to-person lending is available in two different models. The first features an auction system where Lenders bid on the loans they are willing to provide to Buyers with varying backgrounds and credit scores. These loans are usually limited to $25,000.

The second type of P2P Lending is called Family and Friends. Instead of an auction system, F&F works with borrowers and lenders who already know each other, such as business associates, family members or neighbors. Sites using the F&F model protect your relationship with the lender by formalizing the loan and provide loan servicing.


SBA Financing:

The SBA is the US Small Business Administration. Their 7a program allows you to obtain SBA guaranteed financing for business acquisitions. With this, the SBA guarantees 85% of the loan. It allows banks to give loans that they otherwise wouldn't and offer more favorable terms than normal. Banks will sometimes finance Restaurants, Bars, Clubs, Gas Stations and Delis if the loan is guaranteed by the SBA.

Many banks offer self amortizing business loans with repayment terms of up to 10 years with no prepayment penalties. If Real Estate is involved the terms can be extended to 25 years.

Banks look at a number of key points in deciding whether to finance a business. These include:

1: A Debt Service of 1.25 or higher. This is the monthly net profit shown on the tax return divided by the loan payment.
2: Personal credit scores over 680 for each borrower and their spouse.
3: A 20 to 30% cash down payment. Because of the banking crisis, this is now often closer to 30%.
4: Key person life insurance, assignable to the bank.
5: Recent work experience in the same industry.
6: Collateral to back up the loan including personal guarantees.
7: An accurate accounting system that provides monthly profit and loss statements and balance sheets.


What is an SBA Preferred Lender?

While many lenders offer SBA guaranteed loans, the most active and skilled SBA lenders are usually part of the SBA's Certified and Preferred Lenders Program. These special institutions are given some additional authority to approve loans which can result in much faster service to the applicant.

Certified and Preferred Lenders receive a 36-hour turnaround on loan applications. Certified and Preferred lenders are selected from the SBAs most skilled lenders and they must re-qualify for this status every two years. Their loans account for about 1 in 6 of all SBA guaranteed loans.

If you apply to a bank that is not part of the Certified and Preferred Lender Program, the bank starts the first phase of the approval process by reviewing your loan application internally. Unless the bank is aggressive in its lending practices, it can take 3 to 8 weeks or longer to find out if your loan has been approved or rejected. If it receives their internal approval, only then is it forwarded to the SBA for their authorization.


Where do I obtain my Credit Report?

Your credit report and credit scores are on file with credit reporting companies such as Equifax, Experian, and Trans-Union. The amended Fair Credit Reporting Act permits consumers to request one free copy of their credit report every 12 months from each of these three major credit reporting agencies.

You can also get your free credit report at www.annualcreditreport.com. You can also call them directly at 877-322-8228.

If you need financing, call us at 631-275-2196.