Search:

Buying a Business Opportunity - Business Loan Options

By: Stephen A. Bush When buying a business opportunity that does not include commercial property, borrowers should realize that commercial loan options will be significantly different when compared to a business purchase that can be acquired with a commercial property loan. This problematic situation occurs because of the normal absence of commercial real estate as collateral for the commercial financing when buying a business opportunity. In terms of arranging the business financing, efforts to buy a business opportunity are almost always described by commercial borrowers as excessively confusing and difficult.

The suggestions and advice in this commentary build upon commercial loan covenants that are commonly provided by commercial lenders willing to offer commercial financing throughout much of the United States for buying a business opportunity. There will often be various private financing scenarios in which the seller might be willing to wholly finance a business opportunity acquisition, and we will not attempt to discuss those commercial loan possibilities in this commentary.

Buying a Business Opportunity - Length of Business Financing to Anticipate

Business financing conditions to buy a business opportunity will frequently involve a reduced amortization period compared to commercial mortgage financing. A maximum term of ten years is typical, and the business loan is likely to require a commercial lease equal to the length of the loan.

Likely Interest Rates to Buy a Business Opportunity

In the current business loan interest rate environment, the likely range for buying a business opportunity is 11 to 12 percent. To put this in perspective, it is not unusual for a commercial mortgage to be in the 10 to 11 percent range. The cost of business financing to buy a business is routinely higher than the cost of a commercial mortgage due to the lack of commercial property for lender collateral in a business opportunity transaction.

Down Payment Expectations to Buy a Business Opportunity

Depending on the specific type of business and some other issues, a normal down payment for a business loan to buy a business is 20 to 25 percent. Some seller financing (such as 10 percent) is usually helpful and in some cases might reduce the down payment required from the buyer to buy a business.

Refinancing Alternatives After Buying a Business Opportunity

A related business loan issue to anticipate when buying a business is that refinancing the business opportunity loan terms will normally be even more difficult than the original business financing. There are currently some new business loan programs in the final stages of development that could dramatically improve future refinancing options. But until these new business financing options are finalized, it is important to arrange the best possible terms initially and not depend upon refinancing possibilities.

Buying a Business Opportunity - Lenders to Avoid

The selection of a commercial lender might be the most important phase of the business financing process for buying a business. An equally important task is avoiding lenders that are unable to finalize a commercial loan for buying a business.

By avoiding such lenders, commercial borrowers are likely to avoid many other business financing problems frequently associated with buying a business opportunity. Avoiding problem lenders will be instrumental to the eventual success of both the business loan process and the long-term financial health of the business being acquired.

Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.