It's possible to arrange financing to buy a business if you don’t have a great credit record, but you’ll need to convince the lender you have what it takes to make sure the company will be a success. Most lenders, even sellers who are carrying back part of the purchase price with a promissory note, are concerned about whether the entrepreneur who’s borrowing money to purchase a company has a good history of paying his bills. But it is just as important--perhaps more so--for the new owner to demonstrate how the payments will be made on time. Some of the points to emphasize include:
1. Business experience--without a history of success in business, particularly if it’s the kind of business being purchased, the borrower will have a difficult time persuading any lenders to advance the money needed to make the purchase. Any skills you have that might be usefully applied to succeed in the business should be emphasized on a resume.
In addition to describing general business experience, make sure to point out areas of particular ability, such as sales and marketing skills, managing employees and generating financial reports. Many creditors would rather provide financing to buy a business to someone who has proven ability in business operations, than an individual with perfect credit but no relevant experience.
2. Other assets--a trust deed in real property, a security agreement that provides the lender an interest in business assets, or other collateral that can be offered to secure the loan will help persuade a lender to make a deal with someone who has a blemish on her credit history. With more than one lender, however, this may be difficult to accomplish. Anyone granting a loan will want to be the lender in “first position” with the primary right to take the collateral in the event of default.
3. Other income--showing that there are sources of income other than the business can reassure a prospective lender that you will be able to make the payments even if the money isn’t coming from the business operations. A spouse’s earnings, income from a trust or government program are examples of additional money coming in for household expenses and to service the loan used to purchase the company.
4. Co-signer--Also helpful in getting a loan for a business purchase is a guarantee from someone who will make the payments, should the borrower fall behind in meeting the obligation To be an acceptable co-signer, the person will have to demonstrate to the lender’s satisfaction, the financial ability to guaranty the loan because of extensive assets and/or income.
When applying to an institutional lender, to the seller or anyone else for financing to buy a business, it's best to have a good credit record. If that’s not possible, the entrepreneur will need to show he has a strong business background and other factors that encourage the lender/financial institution to cooperate.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.