All Topics / Help Needed! / Using business income as guarantor to a loan

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  • charliefaddoul
    Participant
    @charliefaddoul
    Join Date: 2022
    Post Count: 0

    Hi everyone,

    I’m in the process of acquiring a cashflow business. In Steve McKnight’s book he talks about using income from a job and becoming a guarantor for the loan. I am wondering if this is the same process with business income.

    So the question I am asking is, can the revenue of a business be recycled using trusts? And also will the banks lend money based on the revenue of the business or only the free cashflow?

     

    Thanks,

    Charlie

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Charlie,

      So the question I am asking is, can the revenue of a business be recycled using trusts?

    I thought Chapter 9 covered that bit quite well….  Or was your question a bit more broader than the book covered?  Maybe change the question if it needs to be more definite in its focus.

    And also will the banks lend money based on the revenue of the business or only the free cashflow?

    Are you asking whether the Bank looks at Gross or Net Revenue?   That’s what it seems like to me.  In answer, I’m sure they’d want to look at both.  And probably it needs a bit of time too – i.e. they like to see a business has been in operation for some time (not just a startup).

    Benny

    charliefaddoul
    Participant
    @charliefaddoul
    Join Date: 2022
    Post Count: 0

    Thanks Benny for the reply,

    My question was a bit broader, I should have included more detail.

    Basically, if a business has acquired assets with its revenue and incurred debt to expand business operations, will the banks still be in the position to lend money, based on the revenue or net worth of assets. So for example, would the business income still be used as a guarantor for the loan if it is theoretically running at a loss (because it has acquired more assets and incurred “good debt” to expand operations).

    Obviously, business structures are more complex than just a PAYG income, so I was wondering about the specifics of the lending criteria.

     

    Thanks for your help,

    Charlie.

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    It can be hard to get loans based on business income Charlie. Let me explain…

    First of all, the business is its own entity, and if it already has debt then that will count against further borrowings. The business will likely need several years of financial statements and tax returns to support profitable operations, or else will require a director’s guarantee to support the debt. Furthermore, most borrowers will only take a portion of the net income, and possibly a conservative portion!

    What happens in practice is that business profits usually flow through to the owner, who then has that profit reflected on their income tax return, and who will then use that income as evidence to support borrowing capacity – either in their own name, or as a guarantor. Again, a lender may discount this income to some (or all) extent depending on their assessment of its reliability.

    Re: the specifics… get in touch with Chris Berry and ask for his assessment. He can be contacted at http://www.PropertyInvestingFinance.com

    Bye,

     

     

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    charliefaddoul
    Participant
    @charliefaddoul
    Join Date: 2022
    Post Count: 0

    Thank you Steve for the reply,

    I will definitely have to look into the specifics to get a figure for borrowing capacity.

    Thanks,

    Charlie

    Profile photo of IanGrahamdIanGrahamd
    Participant
    @iangrahamd
    Join Date: 2023
    Post Count: 0

    You got the specifics of the borrowing capacity, charliefaddoul? I’m asking because I also have the same issue with calculating the proper amount of money that the bank can give to my business. I just sold my previous IT company with the help of business valuation services, and now I’m planning to create a new clothes-related business, so I’m planning to get a loan for these purposes if my previous business credit history will matter if I apply for this loan and for that amount, I can apply? I would appreciate any input.

    • This reply was modified 3 weeks, 1 day ago by Profile photo of IanGrahamd IanGrahamd.
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