How to stuff up finance when buying a business

How to get banks to approve a bank loan when buying a business or freehold commercial property?

Unless you’re a mega brand floating golden arches, banks simply will not lend on a business. So, how do you get a loan application to go through? We face this problem every day and hear first hand from lenders how buyers can stuff it up!

Firstly, Golden Rule No.1 “the bank will place ZERO value on a business’ goodwill unless you’re a mega brand” despite how long the business has been trading, or whether it’s under management, or whether it’s got contracts with mega clients and mega suppliers, or whether sales are trending upwards with profits like you wouldn’t believe! Banks will NOT lend on a business unless you are a mega brand.

So how do you get finance when buying a business? You need to be able to pay for the business with Cash. If you don’t have enough cash then you need to have the loan secured against assets of value such as property, plant & equipment or motor vehicle.

But what about all the income that the business you’re buying is showing? Why can’t the bank lend against that? Simple answer: “because that’s  what the current owner is making, not you”.

This takes us to Golden Rule No. 2 “You have no history of running the business“. Lenders may ask for trading reports of the business but this is simply to assess the serviceability of the loan rather than to actually lend against the business. They may also ask you for a resume/CV outlining your experience and/or business plan but this is to comply with their requirements under “responsible lending”.

So, how does this information help you? Well, look at the risk that you are projecting to the lender. If you have zero to little relevant experience in the business that you are buying then you can bet that you’ll get knocked back on finance. We have seen buyers with over 50% cash and 50% equity available in property get knocked back because they “don’t have enough experience” and this is for a business run Under Management! If you don’t have relevant experience banks will severely penalize you and can outright refuse you finance under their “responsible lending” criteria. They see this as “buying yourself a job”. So, how can you get over this hurdle?

A couple of ideas that can work:

  1. get the Owner to agree to stay on for 6months to 12months or as long as you can until the banks are satisfied that this is long enough; and
  2. buy under two owners so that one stays on as a working owner and the other stays employed in their current job hence reducing the perceived risk of you running the business and not being able to service the loan.

Golden Rule No. 3 “Don’t buy a business with freehold property unless you can pay for the business in cold hard cash and have at least 50% cash to pay for the property “. So, we’ve ruled out getting a loan for the business ’cause it’s not going to happen. Now, you need to come up with finance to purchase the freehold property. Lenders are offering 50% to 60% LVR on commercial or industrial property in QLD. If the property offers “limited use” and/or “low return on investment” then you would be lucky to get 50% LVR.

You need to demonstrate to the lender that the property has not hit it’s maximum potential use and offers a high realisable return on investment particularly if you are already pushing your luck to come up with 50% cash to purchase the property. This gets back to your Business Plan and Cash Flow Budget. Consider what’s happening in the business/area/industry that can increase sales? Can you subdivide or are their other development approvals that can increase your rental yields? This will get you out of the “waste basket” and offer some chance of getting a “yes”.

Golden Rule No. 4 “use an experienced finance broker who has completed a similar transaction“. A good finance broker has access to an incredible range of lenders from the majors to independents to private lenders. If you have a favourite lender, firstly, tell your finance broker. Don’t assume that just because you’ve been banking with your favourite bank since you were 10 years old and  have bought properties through them that this will win you any favours. This is probably one of the worst mistakes a buyer makes when going for finance to buy a business. Firstly, unless you are happy for your bank to drill down into EVERY account you have with them and can see how you spend your money then proceed with caution.

An experienced finance broker probably knows more than your local bank manager and generally has access to “wholesale packages” that are not generally promoted within a bank. This could mean the difference between whether or not you can get a loan that you can service. If you still want to go through your favourite bank, then make sure your application is presented in its best possible light (some things seem harmless at the time but actually destroy any chance of getting your loan approved). Once you stuff it up, then you can bet other finance brokers and lenders will know about it the next time you go for a loan!

This information is intended to be a guide only based on our experience with lenders. We are not Financial Advisors. To speak with a financial advisor please refer to our Recommended Contacts for a list of Financial Advisors.

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