Archive for September, 2009

Banks Finance Assets

Banks are reluctant lenders for small business acquisitions by first-time buyers.

For many reasons, small business acquisition lending is often considered too risky and too cumbersome unless the loan package fits under some type of government-subsidized guaranty program. Even then, the amounts banks will finance are usually limited by the values of the underlying tangible assets being pledged as collateral.

Banks shy away from business buyers without previous experience in the business they are trying to finance. Many small business loans are also just too small to be attractively profitable to a bank.

When banks do finance your purchase of a small business, it’s because you’re a favored customer or you and the business fit the profile that will work for a government-guaranteed loan.

If you have good character, relevant business experience, a healthy down payment, cash reserves and great credit, you have half of what’s needed. The financial ratios of the business also need to be acceptable. The bank is looking for collateral and a capacity to repay the loan from business cash flows.

When the borrower and business are found worthy, banks will finance 50-80% of real estate values, 75-90% of new equipment values, 50% of used equipment, and/or 25-50% of inventories. They generally don’t finance intangible assets, except accounts receivable, for which they will finance 80-90%.

But, if you’re a first time business buyer, with no previous direct experience in that business, don’t count on the bank. Rejection rates for small business acquisition loans probably exceed 80%!

Banks still don’t train branch managers and junior lending officers in how to screen applicants effectively. So, at the urging of these front line bankers, a lot of time is spent by loan applicants on business plans that never go anywhere. This is an important point to understand if you are involved in a time-sensitive buy/sell transaction.

Source : Glen Cooper, CBA, is a Certified Business Appraiser and is President of Maine Business Brokers


Seller Financing Common

Sellers often prefer to finance their own business sale because ‘playing bank’ can be a smart strategy to achieve the highest possible purchase price. But, even when they don’t want to, the realities of the sale often force them into it. Buyers need and want seller financing.

Sellers typically finance from 30% to 70% of the selling price. They usually take an interest rate below prevailing bank rates. Seller note terms are usually easier to negotiate than bank note terms. Sellers are usually more flexible because they understand the needs of the businesses they sell.

Sometimes, banks will only participate when there is a large amount of seller financing to indicate that the business is sound in the eyes of the seller.

Keep in mind, however, that sellers who are willing to finance buyers, like any other lenders, are also going to want a security interest (like a first mortgage on real estate) that makes sense to them. Seller are very reluctant to finance large sums if they are forced to accept a security interest which is subordinate to that of another lender.