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Borrowing to buy a Business - It’s all about Serviceability

Borrowing to by a business - Hallam Jones

There are several reasons why it could make economic sense for you to buy an already existing business, particularly at this present moment. Buying an existing business means that you will gain the customers, brand, experienced staff members, suppliers, long-term contracts, business plan and premises.

With a potential recession looming, you may be able to get an excellent deal and avoid the precarious start-up phase when many businesses are forced to close.

Here is what you need to know about borrowing to buy an existing business:

A lender who is considering you for lending to buy or set up a business will be looking for the same assurances as with other lending, but the things that they will reference to get those assurances will be different. If you look at it from their perspective, they make money out of lending money so they want;

A) confidence that they will make the money that they expect to (usually through the interest rate that they charge you) and
B) that the risk of not making that money is minimised. The obvious danger is that you will not or cannot pay the lending back.

So, when assessing your application they will consider carefully your conduct/behaviour around money management to date and your income, specifically around your ability to pay the lending back and how quickly you can do that. This is called serviceability.

One more point around serviceability is that it is against the law for a financial institution to put a person into financial hardship so serviceability is theirs to prove not yours to convince. They will make that call not you.

Lending Criteria

Where a business is concerned there are criteria that an experienced assessor will be able to review and have confidence that your serviceability is good. This includes your experience in the industry, the history of the business, the books and potentially, cashflow projections.

A note on these though, they must be accountant prepared and credible. Lenders will not be interested in your estimates and assurances.

So much can be gleaned from a business' books though. If you buy a business the books will have to be up to date, transparent and truthful. A good assessor will know exactly what the books are saying about the viability of the business and the conduct of the owner/operator.

Other considerations will be, the industry overall, its sustainability and history and current market conditions. You can add to your application with contract documentation that assures future revenue but these would be included in cash flow projections anyway. Contracts for future business are good but good history is better.

Are you ready?

If you are considering buying an existing business or borrowing from a lender, it is important that you speak to an advisor to make sure that it is the right decision for you. Talk to one of our experienced team members today.

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Want to find out more? Simply give Thomas O'Leary a call on 0800 404 202 or send him a message