- The types of bank loans that may be appropriate for your prospective new business vary depending on the nature of the business, its financial condition, past operating results, and future prospects. For example, if the predominant asset of the business is real estate, you may receive better interest rates and longer repayment terms. Conversely, if you are purchasing an e-commerce retailer, particularly one that drop-ships products (with little or no inventory), your rates will typically be higher with shorter repayment terms as business collateral is small.
- An often important component of a business's selling price is "goodwill." Goodwill is the value of the branding, image, and customer satisfaction efforts of the business over time. Businesses need to use subjective criteria and creative data formulas to arrive at this value. Because of the subjective nature of this calculation, banks seldom want to involve goodwill into their loan offer. Be aware of this when you evaluate businesses for sale and the bank financing you'll need to complete a purchase.
-
When you are focused on purchasing a business, you sometimes adopt an "any financing at any cost" mentality. Unfortunately, many otherwise viable businesses can drown under the weight of excessive debt. Experienced bank loan officers will analyze the debt structure carefully and will often advise purchasers if the debt level is dangerous, sometimes refusing to make the loan even though, on paper, it makes sense.
However, it is really your responsibility to evaluate the effects on net income projected by the bank loan(s) you use to purchase a business. Consider more than just the current income levels enjoyed by the business. Project possible income reductions caused by competition activities, economic downturns, and/or new products from other companies that challenge your offerings. -
If you are seeking to purchase a small business, which are the majority of U.S. businesses for sale, the SBA will probably be your best source of bank loans. The SBA will guarantee up to 85% of a bank loan for starting or purchasing a business.
Many banks typically only offer loans to small businesses in partnership with the SBA. These banks believe the risk of small business failure is simply too high to make commercial loans without this guarantee. Consider this policy a benefit for you as you will often enjoy lower interest rates and better terms using an SBA-backed loan. -
There are benefits and concerns with both typical types of business financing: bank loans and outside investment. Investors are not creditors and monthly debt service payments are not required. However, you may have partners in your business forever. This may--or may not--work well for you.
Using bank loans to finance the purchase of a business will require monthly repayment, but, at the end of the loan term, your cash flow becomes much improved and your "temporary partner" (the bank) is no longer involved. Any restrictions on the use of some business assets you faced will also be removed, allowing you to use, sell, rent, or convert these assets as you see fit.
Of course, all interest costs will also be tax deductible, which offers some relief during the loan term. This rule also applies to points paid and other costs to get the bank loan. However, always discuss the tax ramifications with your accountant or tax adviser.
