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  • Profile photo of SebastianSebastian
    Member
    @sebastian
    Join Date: 2003
    Post Count: 55

    I know this is a bit off the topic of property finance. But I was wondering if anyone could comment on the workings of finance for a business.

    If you wish to purchase an established business with a long financial record, proven sales and profits. How will the bank or finance house take this into account in terms of serviceability of the loan?

    Do you have to be able to service the loan through your own existing income streams or will the bank take into account income from the business in order to service it? And if they do, how much?

    Also how much of a deposit is generally required for a business loan?

    Thanks in advance for any comments.

    Sebastian

    Profile photo of cam245cam245
    Participant
    @cam245
    Join Date: 2004
    Post Count: 9

    I have been in business for myself now for over 15 years and it is my experience that lenders do not like lending money with out bricks and morter security. There are probably exceptions but the interest rate is generally high.

    You did not say wether you have your own home because if you do you would be better off to borrow against the equity in your home and use the borrowings to buy the business, thats assuming all the numbers stack up and having bought it you can make a profit and support the borrowings as well.

    Profile photo of SebastianSebastian
    Member
    @sebastian
    Join Date: 2003
    Post Count: 55

    Hi cam245,

    I do have 2 houses with equity, so the security side of it is not so much of a problem. What is more of an issue that I need to address is the serviceability of the loan.

    Would the banks take into account the net profit of a business when assessing serviceability? For example, when you purchase a new investment property, you state the rental return and the banks take into account 80% of that into the servicability equation. Does this work the same for the purchase of a business?

    Thanks

    Sebastian

    Profile photo of OakleyOakley
    Member
    @oakley
    Join Date: 2005
    Post Count: 10

    Yes, the Bank will consider the established income stream from the business you are purchasing.

    They will however also look at your ability to continue operating the business. They will want to know if the vendor will be opening a new buisness in competition, and therefore be likely to shark some of your market. Also, is the business in a volatile industry, and therefore how reliable are the future income forecasts.

    Business finance is a lot more complicated than home loan finance because it relies more on the future prospects of the business, rather than the historical. I know that sounds a bit round-about, but what it means is the Bank uses historical information to predict the future risk to the Bank.

    It is also more expensive to establish, and the rates are higher, even with residential property as security. However, the benefit is that you are generally dealing with a lending manager who knows about the industry you are buying into, who will be able to turn the deal around much quicker than a residential manager, and who works in a department that is designed to assist business owners, i.e. you will get better service.

    Profile photo of SebastianSebastian
    Member
    @sebastian
    Join Date: 2003
    Post Count: 55

    Oakley,

    Thanks for your input. I’m registered for a “how to buy a business” workshop on Thursday so hopefully this will answer many more of my questions.

    Sebastian

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Its very hard to get finance for a business. If you have equity, then the easiest option is to simply get a LOC for ‘future investment purposes’, then buy your business with this.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    Click below to email me

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of OakleyOakley
    Member
    @oakley
    Join Date: 2005
    Post Count: 10
    Originally posted by terryw:

    Its very hard to get finance for a business. If you have equity, then the easiest option is to simply get a LOC for ‘future investment purposes’, then buy your business with this.

    While that’s sometimes a good option, I don’t agree that it is always the ‘best’ option. Also, if you are going to leave your job to take on the new business, you may face problems here (few residential lenders will rely on unproven income, short of the obiquitous ‘low doc’ loan).

    Profile photo of OakleyOakley
    Member
    @oakley
    Join Date: 2005
    Post Count: 10
    Originally posted by terryw:

    Its very hard to get finance for a business.

    I also just do not agree with this statement at all. It is in fact not ‘very hard’ to get finance for a business, especially an established one. In fact it is sometimes ‘very hard’ to go to a residential lender and say, “I’m self employed and need to borrow money to expand my business.” or “I’m currently employed. I wan tot leave my job and buy an established business.” They are likely to say, “Why are you leaving your job?”

    While they might eventually do it, it is probably going to take forever while the Bankers sort out who has the appropriate delegation to approve the finance.

    Go to a business bamnking department. You’ll be dealing with people who know what you need to succeed in the business, and will be able to provide you with the support and advice you need.

    Profile photo of scott dscott d
    Member
    @scott-d
    Join Date: 2005
    Post Count: 1

    Hi Sebastian

    Myself and my friend are also looking to buy an established buisness and I noticed that you mentioned that you were booked in to a “How to buy a buisness” workshop. Did you find the info useful??? as this may be the sort of thing that myself and my friend need to attend.

    Any help would be appreciated.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    oakley is correct. If you told the bank you wanted to leave your job to start a business, then it will be very hard.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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