Board Topic: Very Small Business loan ?
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Very Small Business loan ?

Posted by: Lisa Oct 18 2003, 09:19 PM
HI!

I am considering the purchase of an internet-based mail-order business, but I know nothing about the financing end of it. It's a pretty low overhead -- maybe 60,000 for the business and inventory -- but I've been warned that banks frown on internet-based business. The original company started in 1994 and has a loyal following (consumable products). Sales to the end of July totaled over 80,000. Should I contact a bank or maybe just use my personal credit card? What are the pros and cons of either? Is there a down-payment percentage that is generally required to acquire a business? If so, what's the usual rule-of-thumb? And what sort of interest rate would I be looking at?

Any help you could offer is GREATLY appreciated!

Best regards,
L.

Posted by: loanuniverse Oct 19 2003, 10:06 PM
Lisa:

It will be difficult, but not impossible to get financing for the purchase. You are right about it being difficult to do because of the industry. However, there are a couple of things going for you.

First The business was started in 1994. Therefore, a good financial history should be available to back up your request.

Second The amount should be small and this means a less strict look at the proposed loan. Note: This does not mean that all small requests get approved, most are not.

Ok now to the questions:

Should I contact a bank or maybe just use my personal credit card?
How much will the purchase be for?

What are the pros and cons of either?
Speed is the big pro for using the credit card. You won’t have to wait for an answer since the credit card line is established. The cons are pricing and structure. The credit card will carry a higher rate and you are essentially buying a long term asset with short-term credit. This is not a good thing.

Is there a down-payment percentage that is generally required to acquire a business? what's the usual rule-of-thumb?
Normally, Banks have some kind of rule regarding the mixture of debt to equity. There are different parameters in every institution. I have seen banks with a very liberal maximum debt to worth of 6.00X, and other lenders that do not like to see it higher than 3.00X

This means that some banks will let you have 6 times the amount of debt than your equity, while others will set the limit at three times.

what sort of interest rate would I be looking at?
This depends.... but if I had to guess, I would say either a floating rate based on prime and a premium of 2% to 4% or a fixed rate from 6% to 8%. This rate would be from a community bank type of institution and is not from some other type of lender that might want more. Also note that this is a complete, absolute guess. I don’t even know how much you want.

I think that is as much as I can cover without further information. Also remember that it has been a long time since I have worked on small business loans so I might be a bit rusty on the pricing.

Good luck, I hope this helps

Posted by: Guest Oct 20 2003, 08:53 PM
Thanks so much for your help.

I would need to borrow about 50 - 60 K. This may sound like a silly question, but I'm a complete newbie. Why would I choose a business loan over a personal loan? I think I could pretty easily get the money at a lower rate with nothing down if I take a personal loan from my credit union. Is there a reason why I wouldn't want to do this?

Also, I'm not in a huge hurry right now as I have a full time job contracted until June. I won't be able to do a whole lot with the business until that time.

While I'm asking questions... the business that I am considering is a Canadian business and I'm in the US. Do you know of any problems I might have in the transfer?

I'm so glad this resource is available! At least I'll sound somewhat knowledgeable when I speak with financial institutions.

Thanks again for your help!
Lisa

Posted by: loanuniverse Oct 21 2003, 08:43 AM
Lisa:

Here are the answers to your last two questions.

Why would I choose a business loan over a personal loan? I think I could pretty easily get the money at a lower rate with nothing down if I take a personal loan from my credit union. Is there a reason why I wouldn't want to do this?

When you say “lower rate with nothing down”, do you mean unsecured? If you are looking for $50,000 to $60,000, it is possible that you may be able to get it. However, an individual must show strong personal income to qualify for a $50,000 unsecured loan at competitive rates. Once again, I remind you that I am not a consumer lending person so I wouldn’t know what industry standards are on those types of loans. In addition, requirements can vary from institution to institution.

The one thing I can tell you is that a decision on the personal loan should be pretty quick. Most lenders have the process automated when it comes to these requests. Your application along with information about your job, income, assets and credit history will be run through a credit score program and the answer can come back as fast as a couple of minutes after submitting the application. The same can be said about a business loan request for that amount, but in the case of business loans more data needs to be entered and not all the lenders have automated the process for business loans.

My opinion: if you can get an unsecured personal loan with a good rate and good terms then go for it.

the business that I am considering is a Canadian business and I'm in the US. Do you know of any problems I might have in the transfer?

Now we are talking something that I am really not knowledgeable at all. Not that this will stop me from commenting. I am just giving fair warning. Off the top of my head, I see some issues, that may or may not apply.

1- What exactly are you buying? Is there any physical equipment used to make the product that is sold? Is there any inventory?
2- Are you planning on moving operations to the US?
3- Hosting can be in a Canadian server or a US server. This is not as important as the place where you operate and ship from. Tax implications! You will need to collect sales tax for those customers in your state.
4- Suppliers? Will they have a problem sending the products to the new location? Shipment fees? Or does the product gets sent from the manufacturer directly to the end consumer? {assuming you don’t stock inventory}

Good luck.
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