An important source of funds tapped by BizBuyFinancing clients to purchase small and mid-sized businesses is business banks and commercial lending institutions. Typically, these institutions offer loans of a five-to-nine-year duration. Funding requests might be for a figure as low as $100,000, with maximums into the millions.
Fixed interest loans at rates competitive with those offered by the SBA-backed lenders
are usually offered by most conventional commercial lenders
with whom we work. When establishing commercial loans interest rates
, commercial lenders ordinarily offer rates higher than the more traditional SBA-backed loaning. Rates depend on the length of loan and quality of collateral, both by the business and the borrower.Success at getting a loan approval from commercial lending institutions is dependent on a few critical and some minor factors. Our experience with this source for business loan financing
, and the way it has changed over the past 20 years, provide knowledge and tools we use to help clients achieve that success.The Two Step approach to serving BizBuyFinancing clients applies to commercial loans
in much the same way as when seeking funding from an SBA-backed lender. Our signature Professional Prequalification Program, or step one, enables entrepreneurs to be completely prepared beforehand. So when a desirable business opportunity is found, we can help the buyer move quickly and efficiently to line up the money needed for the deal. That often successfully finalizes a transaction fast -- because you were able to remove the financing contingency on time. As a result, you don't lose out on a good buying opportunity due to an impatient seller choosing another ready buyer.
Choosing the proper commercial lender candidates and applying for the needed funds is the second step.
our awareness of which lenders are, at a particular time,
willing and ready to quickly review and decide on a request for the cash that will facilitate a small business purchase. By "packaging" and presenting the borrower and the business in a way most likely to generate loan approval from a commercial lender, much of the emphasis is placed on the credit record of the borrower and the quality of the security offered for the business acquisition loan.Presenting the borrower's history needs to be handled correctly, particularly if there are some challenges in the credit report or a record of arrest.
The individual who is hoping to buy a business but "dogged" by negative actions in the past is urged to "reveal all" when a loan application is prepared. We've learned that in many cases these issues are not insurmountable obstacles. However, failing to be forthright about such problems is most certainly going to cause the application to self-destruct. Lenders inevitably unearth the "skeleton in the closet" in a borrower's past. Our support is geared toward mitigating the impact of negative information, rather than avoiding problems and hoping they won't surface.
Quality and value of collateral is the other key factor usually determining the outcome of a loan application.
As a matter of policy for most business banks, the underwriting criteria require the value of the security to at least equal, and preferably exceed, the loan amount. It's not uncommon for a loan officer to request that a borrower put up his home as collateral, even though the personal real property has nothing to do with the business. Commercial lending institutions often want the added security although they also require the right to seize business assets, including equipment and furnishings, accounts receivables and inventory, in the event of default.Minor factors also might enter into a lender's analysis
when deciding whether to approve or deny a loan application for funds to help buy a business. The size and reliability of the business cash flow may be paramount in importance for an SBA-backed lender. But it's not the orientation of commercial lenders. Bankers asked for commercial loan financing
are less concerned with the subtleties in the performance history of the company being purchased. We do know of some commercial lenders, however, that use benchmarks similar to those employed by cash flow-oriented institutions. The objective here is to determine if the proposed loan payments will exceed a certain percentage of the income.
Other factors that are less critical in a commercial loan application for a business purchase
include management contracts and account concentration. These are more important aspects of a lending request when reviewed by SBA-backed financial institutions. A plan by a key employee to no longer manage the company when it is sold usually won't discourage a commercial lender from funding the deal--particularly if the new owner will take over management duties. That's not always the case if the applicant seeks an SBA 7(a) product. And while SBA rules discourage loans to purchase companies that depend on a few customers to supply a high percentage of business, this issue is of less concern to commercial lenders.
Deal analysis also takes a back seat to value of collateral when a loan application is being considered by a commercial loan source. We instruct borrowers to be cautious when preparing loan applications, however. Our assistance includes making sure the request demonstrates to the satisfaction of the lender that claims of others who are advancing money for the purchase--including the seller taking a carry-back loan--will not jeopardize the bank's ability to collect its full payoff on the obligation in the event of default.
Offering business acquisition financing provided by commercial lenders, as well as SBA-backed financial institutions, gives BizBuyFinancing access to more financing solutions for business buyers, owner/sellers, & intermediaries. Much of our success in this results from understanding the particular needs in the commercial lending marketplace.