Sam was surprised and disappointed to learn his request for a loan to buy a business was denied simply because the bank did not approve of the way workers in that business were being paid. The manufacturing firm he wanted to purchase was compensating three sales people only with commissions on the customer orders they obtained. There was no salary paid to them and the business owner had listed all three as independent contractors, rather than employees of the company.
When he finally learned why the application was turned down, Sam complained to the bank’s president and showed the company’s financial statements, even the most recent Federal income tax return, to prove that the method of compensation was clearly reported to the government and also that the company generated plenty of money that would be available to Sam to honor his loan obligation. He was informed the bank underwriters felt there was a risk that taxing authorities would decide, in a few years, the individuals were not independent contractors, but were employed by the manufacturing company. In that event, the business might owe thousands of dollars in unpaid back payroll taxes. The bank lending officer’s concern was that this could be a significant financial obligation, making it difficult for the new owner to meet his loan payments.
Sam learned his lesson and when he found another company he wanted to purchase he made sure the people working in the business were actual employees before he made his offer to buy it.
Not all financial institutions will deny a business purchase loan request for that same reason. But many do. The prospective business buyer should be aware of the potential for this problem if looking at a business with workers treated as independent contractor, and if a loan will be needed from a financial institution to help fund a deal.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, advisory & loan placement services.