Purchasing an existing business can be a great way to dive into the business world. Starting businesses from scratch are much more difficult to finance because so many things are not proven. The unknown risks are difficult for any lender to overcome. For this reason franchising, licensing and purchasing businesses that are already in operation are a great way to help lenders get comfortable issuing you a loan. There are some key elements that a lender will look for before giving you a loan. They are,
- Direct Industry Experience: A lender will want you to have 3-5 years of experience in the business industry you are purchasing.
- Liquid Assets: You will need to be prepared to put 15-30% cash down toward the purchase of the business. In addition, lenders will want you to have 3-6 months of working capital reserves after you close the loan and make your down payment.
- Business Performance: Turn around businesses are very difficult to get a loan for. Lenders do not like to lend to a turn around strategy no matter how proven it may be. To get a turn around loan to fund you will have to have extremely strong mitigating factors. Good stable trends are what lenders will be looking for.
- Business Valuation: Depending on the size of the loan request, lenders will require a independent business valuation to be ordered. This valuation will determine the purchase price for the business that the lender will use. There are many factors that can impact the value of a business. The independent report will help mediate the risk for the buyer and lender.
There are many things to consider when starting or purchasing a business. It is important that you understand the rules of the business financing game, how to play, and what will make you successful in obtaining the loan you desire.