Question I have an opportunity to purchase a small business
(probably around $80,000.00). I am interested, but wondering about the financing. I own a house worth about $200,000.00 and another $100,000.00 in RRSPs,
and have no debt. I don't want to use RRSP money.
I believe the business can finance an $80,0000.00 loan. Without any actual cash to put into the
business, could I expect to be able to borrow the money with my home as security for the full purchase price? I realize you don't know all the details, but, in general, would a bank make a business loan for the full amount based on the security of a mortgage, given that they are satisfied that the mortgage can be repaid?
I am not nearly ready to commit, but just wonder
if it is realistic to expect to be able to fully finance in this way?
thanks
M
Answer Dear blakjak:
For business purchase you must put down at least 15% - 20% down payment. The absolute minimum that you can put down is 10% with the second loan from the seller for a total of 15% - 20%.
As a rule the bank will finance 80% - 85% of the purchase price.
So you will need $12,000 - $16,000 for down payment.
Business is collateral. Here is the formula how to calculate the hard value of Business Collateral (BC):
BC = (Market value of commercial real estate * 80%) + (Equipment value * 50%) + (Inventory * 10%);
For example:
Commercial real estate - $50,000
Equipment value - $30,000
Inventory - $40,000
Business financial performance is collateral too. Request 2-3 years of business tax returns. Taxable income should not drop more than 5%. If it is dropping you have no chance to obtain a loan, unless you will put your own property as collateral. My advice – don't do this. Business in distress is hard to turn around.
Your houses can be considered as collateral but not at Appraised value. Here is the formula:
Collateral value of the house = (Market value * 80%) - Remaining Mortgage Value.
For example:
Market value - $200,000
Remaining Mortgage - $120,000
Collateral value of the house = ($200,000 * 80%) - $120,000 = $160,000 - $120,000 = $40,000
You can use home equity line for a down payment (but not more than 50% of a total home equity line). It will also decrease your collateral value.
For example you will take $30,000 (example above) from home equity line for down payment.
Collateral value of the house = ($200,000 * 80%) - $120,000 - $30,000 = $160,000 - $120,000 - $30,000 = $10,000
Good luck,
Marina Lando
Business Loan Quest
www.blquest.biz
