Why is getting a Loan to Buy A Business So Complicated
Why is buying a business so complicated? There are many reasons but the simplest is that you have to get them all right to move forward and take the final step and become a business owner. For most buyers that start their journey, their first step is to find a business for sale. For good reason they think that it doesn’t make sense to do anything else first because if they can’t find a business to buy, the rest goes away.
My suggestion, however, is that if you are thinking about buying a business and you will need to borrow money to close the sale, the first and best place to start so you don’t waste a lot of time, is to find out if you can get a loan. It’s common for home buyers who need a mortgage to buy a house to first talk to a mortgage broker to make sure they qualify and how much they would be able to borrow. The same approach applies to buying a business.
How to get a loan to buy a business
If you are thinking of buying a business and will need to get a loan, here are six things that may prevent you or slow you down from being able to own and operate your own business.
1. The business has not been in existence long enough.
If you are looking to buy an existing business, before a lender is willing to extend a loan, they will want to review the current performance of the business. The current performance means, at a minimum, the financial performance of the business for the last three full years.
The historical financial performance of the business tells a story. A minimum of three years demonstrates the growth (or lack of growth) and its direction.
The good news for you is that if you are unable to get a loan because the business has not been in existence long enough, the lender is helping you make a good decision and that is to find a business with the necessary longevity and depth so it will increase your chances of success.
2. The business you want to buy isn’t making enough money.
If the business you would like to buy has been around long enough, that’s not enough for you to get a loan. That’s because the best reason to prevent you getting a loan is that the business is not making enough money.
A lender wants to make sure if they offer you a loan they will get back their money plus the necessary interest they need to fund and run their bank or lending institution.
3. Your credit isn’t good enough.
The first two reasons I gave above are outside your control. This reason, however, is all about you. This is the most common reason why loan applicants get turned down for a business loan and that is, because of poor credit. If you are thinking of applying for a business loan, first check your credit score so you know what the lender is looking for before you apply. Equally, also check your credit report in case there are items on your credit history that are wrong and should not be there and prevent you from getting your loan approved.
4. You are in the wrong industry
It won’t work to go into Burger King and ask for a Big Mac hamburger. Similarly, if you are looking for a loan to buy a construction business or gas station or restaurant you want to apply to the right lender. Check out what lenders approve loans for the industry you want to own and operate your business as not all lenders like all industries. Indeed, some lenders prefer some industries as they have an expertise and understand that industry inside out and will know your chances of success.
5. You don’t have a business plan
The business lending process is mainly about data. The data includes the performance of the business which is shown by the financial statements, a lease to show the business has a future, a list of fixtures, furniture and equipment to identify the assets and most important of all, a business plan.
It needs to be a well thought out and well written business plan so the lender including the underwriter or the loan committee you may never get to meet say “this borrower knows their stuff.” The lender wants to know that you know where you came from. They want to know where you are now and just as importantly, where, how, when and why you want to use their money so you will be successful.
6. Your downpayment is not high enough
Lenders want to see the business you want to buy is financially viable, that you understand your industry, you have a business plan that clearly maps out where you want to go with the money you want to borrow and that there are positive growth prospects for your business.
However, most important of all, they want to know you are not only willing to put in the time and effort but also your own personal finances or what is known as ‘skin in the game.’ They want to know when you’re owed money you’ll chase it, if you have too many employees you’ll either have to cut or re-train them and that their loan will get paid on time. The bottom line is that they want to know that you believe in your company and will do all you can to make it survive. The way they do this is test to see how much you are willing to contribute or lose everything. They test your resolve with the amount of your own money you are prepared to lose. If they think it’s enough they will be willing to invest their money. If it’s not enough, they will decline the loan.
How to get a loan to buy a business? There are many steps to buy a business. If you would like an overview click this link for a one page summary.
If you would like more information about buying a business please visit my webpage Buy a business or buy a copy of my book Successfully buy your business. For more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.