Because there are different kinds of business purchase loans, the buyer trying to get funds to acquire a company needs to analyze what’s available and determine which lender is the most suitable for her circumstances. Choice of the best kind of loan to get begins with deciding whether you want the lender able to respond most quickly, to offer the lowest rates or to provide some other important benefits. Three suggestions for selecting the type of lender that might be most appropriate for your deal are:
Hard money lenders are the private investors who can make a quick decision and write a check while other money sources are still working on preliminary paperwork. You might pay a premium of two to five percent annual interest more for a private loan than would be charged by a regulated institutional lender. And you need to be cautious when borrowing from someone who doesn’t have to comply with all the regulations imposed on banks to protect consumers. It’s a good idea to check lender references so you can avoid being victimized by predatory lending practices. If the seller involved in a great business deal says the “first person who comes up with the cash can have the business,” you might want to consider finding a reputable hard money lender.
Conventional lending institutions, such as commercial loan departments in business banks, provide a sizable number of business purchase loans because of their exposure in the community and the other services they provide to small businesses. These organizations ordinarily offer loans that come due in five to nine years at interest rates that will range from two to three points above the prime-lending rate. One factor determining the amount of interest charged is the estimate of risk the lender will assume.
If you’re a borrower who has pledged plenty of collateral to cover the amount of the loan, it will help you get a loan approval and a competitive rate. The banks can be slow to respond, however, unless you have a great relationship with a loan officer, or you’re working with a loan broker who has good access to the loan application decision makers.
Cash flow lending is one way of describing the practice of the institutions that usually offer SBA-backed loans. Because the purpose of the Federal agency is to promote growth of small businesses, it guarantees much of the loan amounts provided by its participating lenders, motivating them to provide funds needed for business acquisitions and expansions. The typical SBA loan programs are structured for a long duration, 10 years is usually the minimum, with a maximum of 25 years, particularly if business real estate is involved.
While underwriting criteria for SBA-backed loans require close examination of the borrower’s security, these lenders are able to put more emphasis on cash flow as a critical factor than are conventional commercial lenders. The SBA supports the idea of a businesses changing hands if that might result in more sales and more employees.
So its lenders often are encouraged to provide financing to facilitate a sale, even if it appears the deal is low on assets for security, but will result in plenty of cash flow to grow the business and cover the borrowing costs.
With some insight, along the lines provided here, about the kinds of business purchase loans available, a buyer will be in a better position to choose the most appropriate lender for his deal.
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.