3 Secrets to Obtaining Loan Approval for the Purchase of Your Business
3 Secrets to Obtaining Loan Approval for the Purchase of Your Business
Many loan applications, for the purpose of buying a business, are rejected. They are often rejected because the borrower does not know how to properly package the loan.
The loan package must demonstrate many things to the banker. The most important thing the applicant must show is the ability to repay the business acquisition loan.
Proof of Ability to Repay Your Business Loan
The bank is most concerned about how you will pay them back. They look at three things.
Your ability to run the existing business and the cash flow it will generate.
Your character and the likelihood you will hang in there when things get tough.
Finally, your other collateral to repay the loan with if all else fails.
The key to getting loan approval is to show how you meet each of these criteria.
Secret Number One - Legitimately Improve the Past Cash Flow of the Business
You must really get into the heart of how the business has been run the last several years. You must take the figures in the financial statements and tax returns and break them down.
You are looking for mistakes and legitimate changes that can improve cash flow. By improving cash flow of the business you are showing the banker that there is money available for repayment. Remember that each of these improvements will have to be backed up by written documentation.
A few examples are:
Salaries to Managers or Staff - Often a person who is ready to sell a business has not been working as hard as the new owner will. This is to be expected. Often the new owner will not need a manager or other person. What must be shown is that the owner was not working full time at the business, the manager performed functions the owner could be doing if there, and what the salary savings are by letting the manager go. You can then add back the salary.
Adjustments in Rent - Owner operators often own the building they use. We have seen owners that charge their business too much rent. The excessive rent can be added back.
Price Increases - In heavily regulated businesses prices may be totally dictated by a government agency, third party provider, or other sources. If over time prices have gone up you may be able to restate the prior years revenues at the higher rate.
There are many other possibilities depending on the circumstances of the business and the lender. This is where experience pays off.
Secret Number Two - Demonstrate How Related Experience Will Help You Run This Business
Lenders need to understand that you have the experience to run the business. For example, many victims of corporate downsizing do not have direct experience in running the types of businesses they want to buy. They must show how the tasks they have been doing relate to the tasks required in the new business.
To do this you must break down the tasks performed. For instance we have seen working in electronic supply chain management related to the work in a small nursery wholesaling operation.
Secret Number Three - Apply at More than One Institution
Different lenders will be comfortable with different types of transactions. The only way you find out about your request is to try multiple lenders. If you are rejected question the lender why. Take that knowledge and improve your package.
Make sure you try different types of lenders. Try a national bank or two. Try several local banks. Try a loan broker. If the loan is secured by commercial real estate find out what banks are active in the area. Again be ready to make improvements to the loan package every time.
If you don't like rejection use a loan broker. A good broker will know which banks to take the loan to in the first place. They will know how to put the package together. If the loan is rejected they will just take it to the next bank until they get the loan done or become convinced that it will not get approved.
In Conclusion
Make sure your loan package clearly shows the lender how this loan will be repaid. Make sure the cash flow supports the loan amount and repayment schedule. Demonstrate how your experience ties into the requirements of the business you are buying. Finally try multiple lenders and do not get discouraged. The bonus recommendation is if doing these items concerns you then find a competent commercial loan broker who will do this for you.
Greg Caruso, Maryland Attorney, CPA, and Certified Valuation Analyst. 410-507-5441, gcaruso@harvestbusiness.com, www.harvestbusiness.com
3 Secrets to Obtaining Loan Approval for the Purchase of Your Business - To learn more about this author, visit Greg Caruso's Website.
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75% of Commercial Loan Rejections, After Pre-Qualification, Are A Result of Improper Financial Packaging
Many loan applications, for the purpose of buying a business, are rejected. They are often rejected because the borrower does not know how to properly package the loan.
The loan package must demonstrate many things to the banker. The most important thing the applicant must show is the ability to repay the business acquisition loan.
Proof of Ability to Repay Your Business Loan
The bank is most concerned about how you will pay them back. They look at three things.
Your ability to run the existing business and the cash flow it will generate.
Your character and the likelihood you will hang in there when things get tough.
Finally, your other collateral to repay the loan with if all else fails.
The key to getting loan approval is to show how you meet each of these criteria.
Secret Number One - Legitimately Improve the Past Cash Flow of the Business
You must really get into the heart of how the business has been run the last several years. You must take the figures in the financial statements and tax returns and break them down.
You are looking for mistakes and legitimate changes that can improve cash flow. By improving cash flow of the business you are showing the banker that there is money available for repayment. Remember that each of these improvements will have to be backed up by written documentation.
A few examples are:
Salaries to Managers or Staff - Often a person who is ready to sell a business has not been working as hard as the new owner will. This is to be expected. Often the new owner will not need a manager or other person. What must be shown is that the owner was not working full time at the business, the manager performed functions the owner could be doing if there, and what the salary savings are by letting the manager go. You can then add back the salary.
Adjustments in Rent - Owner operators often own the building they use. We have seen owners that charge their business too much rent. The excessive rent can be added back.
Price Increases - In heavily regulated businesses prices may be totally dictated by a government agency, third party provider, or other sources. If over time prices have gone up you may be able to restate the prior years revenues at the higher rate.
There are many other possibilities depending on the circumstances of the business and the lender. This is where experience pays off.
Secret Number Two - Demonstrate How Related Experience Will Help You Run This Business
Lenders need to understand that you have the experience to run the business. For example, many victims of corporate downsizing do not have direct experience in running the types of businesses they want to buy. They must show how the tasks they have been doing relate to the tasks required in the new business.
To do this you must break down the tasks performed. For instance we have seen working in electronic supply chain management related to the work in a small nursery wholesaling operation.
Secret Number Three - Apply at More than One Institution
Different lenders will be comfortable with different types of transactions. The only way you find out about your request is to try multiple lenders. If you are rejected question the lender why. Take that knowledge and improve your package.
Make sure you try different types of lenders. Try a national bank or two. Try several local banks. Try a loan broker. If the loan is secured by commercial real estate find out what banks are active in the area. Again be ready to make improvements to the loan package every time.
If you don't like rejection use a loan broker. A good broker will know which banks to take the loan to in the first place. They will know how to put the package together. If the loan is rejected they will just take it to the next bank until they get the loan done or become convinced that it will not get approved.
In Conclusion
Make sure your loan package clearly shows the lender how this loan will be repaid. Make sure the cash flow supports the loan amount and repayment schedule. Demonstrate how your experience ties into the requirements of the business you are buying. Finally try multiple lenders and do not get discouraged. The bonus recommendation is if doing these items concerns you then find a competent commercial loan broker who will do this for you.
Greg Caruso, Maryland Attorney, CPA, and Certified Valuation Analyst. 410-507-5441, gcaruso@harvestbusiness.com, www.harvestbusiness.com
3 Secrets to Obtaining Loan Approval for the Purchase of Your Business - To learn more about this author, visit Greg Caruso's Website.
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