Board Topic: Pre-Qualifying For A Business Loan
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Pre-Qualifying For A Business Loan

Posted by: Todd May 19 2004, 10:47 AM
Iím looking at buying an established business. I have not narrowed it down to just one but
the business Iím looking at have all been in business for years and are profitable.

Is there a rule of thumb or way to see how much of a loan for purchasing a business I would qualify for?
How much cash down payment do lenders look for? Is 20% down good rule of thumb or?
Is it specific to each business? I do have a personal financial statement with net worth etc.

Also what would you say about the advisability of a pension liquidity trust to use 401k funds for down
payment?

Thank you

TC

Posted by: loanuniverse May 19 2004, 08:44 PM
Todd:

Let me first get out of the way the portion of your situation where my feedback will be of limited value.

"Also what would you say about the advisability of a pension liquidity trust to use 401k funds for down payment?"

I am not familiar with the possible restrictions of your 401K plan. I am willing to bet that this scenario is not possible. In the case that you have a retirement account that allows these types of investments, I would look at this as a matter of risk vs. reward just like anything else. I certainly sleep better at night knowing that I am well diversified in my own retirement plans.

Now to the interesting parts:

Is there a rule of thumb or way to see how much of a loan for purchasing a business I would qualify for? How much cash down payment do lenders look for? Is 20% down good rule of thumb or? Is it specific to each business? I do have a personal financial statement with net worth etc.

All companies within an industry have what are called "industry averages". Even within a same industry those numbers will vary somewhat depending on how much your company averages in sales per year or the amount of assets of the business. That is the reason why you will see industries divided in tiers. It would not be fair to compare a 2,000 store chain to a single unit store.

However, chances are that those industry numbers will take a back seat to analyzing the leverage and debt repayment capability of the company after the loan is granted. The lender {if the lender is any good}, will not be looking at the amount of money that you are going to pay for the business and decide what percentage it is willing to finance from that number. The lender is going to be looking at the proforma financial condition of the business.

Proforma is a fancy financial term to indicate what would happen in the financial performance and condition of a company after something happens. It is very common to see this in both business lending as well as mergers and acquisitions when the company wants you to look at how nice the numbers would look if the two were combined.

You asked if 20% down was a good rule of thumb, but there really isn't a rule of thumb. Having said that, this would leave you with a 4.00:1 debt to worth ratio assuming that there are no other liabilities. {that is too high}. You really want to stay under 3.00:1

There are other ways that you could give the lender additional comfort, but honestly what would make the lender more comfortable might make the borrower less comfortable.

Good luck.
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