Commercial Loans
Business Opportunity Loan Strategies for Buying a Business
What You Need to Know About These Specialized Commercial Loans
by Stephen A. Bush
When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide commercial loans if real estate is not included as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.
The level of interest for buying a business opportunity investment has increased due to the reduction of activity involving residential real estate investing. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.
Unless a prospective business owner has unlimited cash resources, they are likely to need business financing to buy a business. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.
Unfortunately the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some potential limitations and problems unique to business opportunity loans, and commercial borrowers should make every effort to avoid these business financing difficulties.
Here is a five-step process to consider before proceeding.
Begin your business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price.
In most business financing scenarios, a total down payment approximating 20% to 25% of the purchase price is advisable. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing at least 10% of the purchase price from their own funds even if the seller is providing 15% or more.
Evaluate whether a Small Business Administration loan is relevant for your particular business financing and investing circumstances.
This step is both important and somewhat complicated, and the involvement of an SBA financing expert is strongly advised. Among the issues to explore are whether collateral is available for an SBA loan and how important refinancing is to your overall business opportunity funding process.
Determine the length of lease to be arranged in conjunction with buying the business.
As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. The length of the lease is important because the normal business finance terms will restrict the length of commercial financing to the period covered by the lease (although you should anticipate a ten-year maximum for investment business loans). In other words, with an eight-year lease, the commercial loan is likely to be for eight years, and even with a twenty-year lease, the small business funding will probably expire in ten years.
Explore whether including real estate is a viable option or not in order to buy a business.
With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. However, improved business financing terms should not be the sole factor you look at, since the absence of a commercial mortgage can prove to be a significant advantage in an uncertain or declining real estate market.
Discuss business finance options with a business opportunity loans expert before making any offers to buy a business investment.
These discussions should include issues such as potential purchase price, down payment possibilities, seller financing, buyer credit scores, tax return requirements and collateral options.
