Buying a business investment without real estate requires specialized business opportunity financing. Although this kind of business financing is available, there are several potential problems which should be anticipated and avoided by prospective buyers.
In order to buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.
When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.
The level of interest for buying a business opportunity investment has increased due to the reduction of activity involving residential real estate investing. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.
This summary is designed to address the unique business financing requirements involved when real estate is not involved. Our suggested approach to business opportunity financing is provided below.
Prospective business owners should begin business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price. In most business financing scenarios, a total down payment approximating 25% of the purchase price is advisable. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing a minimum of 10% or more of the purchase price from their own funds even if the seller is providing 20% or more.
Purchasers should evaluate whether a Small Business Administration loan is relevant for their particular business financing and investing circumstances. This step is both important and somewhat complicated, and the involvement of an SBA loan expert is strongly advised. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to your overall business opportunity financing process.
Buyers should make an early determination concerning the length of lease to be arranged in conjunction with buying the business. As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. The length of the lease is important because the normal business finance terms will restrict the length of business financing to the period covered by the lease (although buyers should anticipate a ten-year maximum for investment business loans). For example, with a seven-year lease, the commercial loan is likely to be for seven years, and even with a fifteen-year lease, the commercial financing will probably expire in ten years.
Even though real estate is not included in a business opportunity transaction, buyers should nevertheless investigate whether including real estate is a viable option or not in order to buy a business. With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. However, improved business financing terms should not be the sole factor you look at, since the absence of a commercial mortgage can prove to be a significant advantage in a declining real estate market that currently exists in many areas of the country.
Investors and buyers should discuss business finance options with a business opportunity loan expert before making any offers to buy a business investment. These discussions should include issues such as down payment possibilities, potential purchase price, seller financing, tax return requirements, buyer credit scores and collateral options.
As a final precautionary note, in most circumstances the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some problems unique to business opportunity loans, and commercial borrowers should make every effort to avoid these potential business financing complications.
December 24, 2009
How to Avoid Business Opportunity Investment Financing Problems
November 30, 2009
Finding Financing for Your Startup Business
Starting your own business is exciting, but also often a little intimidating. Perhaps the most intimidating part is trying to acquire the financing you will need to successfully start your business. Most new businesses come with substantial startup costs, far more than what business owners can come up with out-of-pocket. Therefore, getting financed is one of the crucial steps to starting your own business.
Unfortunately, not every aspiring business owner is able to find financing. Lenders and investors tend to want to see first that the business — and its owner — has a good likelihood of success before they back it financially. Remember, a lender’s primary concern is making sure they’ll be able to get their money back again — as well as the interest accrued. If you can convince a lender of that, your chances of getting a startup business loan are pretty good.
Here are some tips for how to start your own business the right way — with sufficient funding.
Know the Industry
Experience in your business’s industry is extremely important. Lenders and investors will want to know your background in the industry, because if you know the industry well you have a much greater chance for success. If you don’t yet have experience in the industry, you should consider taking classes or working for a business similar to the one you want to start. You can also form a partnership with someone with the proper experience, form a Board of Directors to advise your company, or hire someone with the required experience as one of your top managers.
Clean Up Your Credit
Many startup business owners mistakenly assume that since they are financing a business, their personal credit does not come into play. Quite the opposite is true. Since your business is a startup, it has no track record, of either income or paying bills on time. As the sole proprietor, it will be up to you to qualify for — and guarantee — the loans your business is given.
In order to put your best food forward, it is important to start this process far in advance. Cleaning up your credit can take several weeks or months. You will need to first pull your credit report from each of the three credit reporting agencies, as major differences can exist between what each one reports — particularly if there are mistakes. Carefully go over each credit report, and contest mistakes with both the credit reporting agency and, if necessary, the creditor. Most credit bureaus offer online forms for disputes, which make cleaning up your credit report easier than ever.
Finally, if there are accurate but potentially negative items on your credit report, you may be able to negotiate with your creditors to remove the items — particularly if your track record with them is otherwise good. Taking these steps ensures that you will make the best possible impression when applying for a startup business loan.
Have Some Sort of Collateral
Just as you will need good personal credit in order to acquire financing for your business, you will also need to be able to provide some sort of collateral. If you are looking for a loan to help you start your own business, chances are you do not have any business property yet — although if you do, that would be the logical first choice. Without business property as collateral, however, you will need to use your personal property to guarantee the loan. Examples of property that could serve as collateral are your home or commercial real estate (minus what is still owed on the mortgage), a work truck or other heavy equipment, and office furnit
Write a Business Plan
While you are going through the lengthy process of cleaning up your credit is the perfect time to thoroughly research your business venture. Starting your own turnkey business is more than just getting a business loan and hanging up your shingle. You will need to know where the market stands right now, where it is projected to go, and how your business will fit in. You will also need to know who your target customers are, and how you will reach them. There are many different factors that play into how successful your business is, and you want to be sure to fully understand all of this before you get started.
Once you have done this research, you will put it together into a business plan. This is important because the business plan is how lenders and investors decide whether your startup business is worth funding. A well-researched, well-written business plan demonstrates that you know your market and therefore have a pretty good chance of starting a successful business.
Starting Your Own Business with the Proper Funding
One of the most important parts of launching a business is getting enough funding to start off on the right foot. Most startup businesses rack up considerable costs, and trying to cut corners on some of these can be disastrous to your business’s chances for success. Most small businesses fail within the first two years, usually as a result of insufficient funding and poor decision making along the way. Taking the time to find the proper funding for your business is imperative for not only supporting a successful launch, but also for making your business more likely to succeed.