Guide to financing the purchase of
a business - Sources of finance
There
are essentially three types of finance source available to assist
in business purchase finance and/or development. These are the
Clearing Banks (Barclays, Nat
West, HSBC, Lloyds TSB, etc.), the Finance Houses/Centralized
Banks, and finally the Building Societies.
Repayment
Periods:Banks and Finance Houses expect repayment in 10/15/20 years
on freeholds with Building
Societies being prepared to consider up to 25 years. Leasehold
loans are usually available only from Banks and are also usually
restricted to a maximum of 10 years or two thirds of the unexpired
period of the lease.
Rates
of Interest:Once again, these vary enormously with Banks charging from
1.5% above their base rate, Finance Houses from 2.5% above their
base rate and Building Societies usually requiring an extra 1% or
2% above
their normal 'house mortgage' rate. Each case is treated on its
merits and you are likely to be offered a much more attractive
rate if you are not seeking either a maximum loan and/or the
maximum repayment period.
Percentage
Advances:These vary from source to source and at the moment, where
the business being purchased is the only security being offered,
freehold loans can be considered usually
up to an absolute maximum of 100% of the bricks and
mortar value, subject to repayability. We do have lenders that
will alternatively lend up to a maximum of 70% of the purchase
price (bricks and mortar, goodwill and fixtures and fittings),
excluding stock, regardless of the freehold value; and other
lenders that will lend up to 75% or even 80% of the total purchase
price, excluding stock, so long as it does not exceed 100% of the bricks
and mortar value. The ability to repay the loan is, of
course, essential.
Leasehold
loans are normally restricted to an absolute maximum of 60% of the
purchase price (excluding stock). Leasehold property should have
accommodation for such percentages to be considered. If the
premises have no living accommodation (known as 'lock up'), the
maximum advance is likely to be 50% of the purchase price; only a
few sources are prepared to consider advances on 'lock up'businesses.100% loans are possible, however, with additional 'outside
security' (see below).
Outside
Security and Income:The availability of outside security can increase lending
beyond the parameters outlined but the additional security being
offered must be considered adequate. Each loan must be repayable
from the profits generated by the business and not be reliant on
the outside income, the latter being considered only as a bonus.
Structured
Loans and Overdrafts:Your total requirement must be considered very carefully on
the basis that it may be prudent to organise only a percentage of
the total requirement on a structured loan basis (i.e. subject to
regular monthly repayments) with the balance then being provided
by way of an overdraft.
Attitudes
vary, but you should really only allow sufficient overdraft within
your funding that can be adequately repaid within a 3 to 6 month
period. Overdrafts that persist beyond this period of time should
really have been included in the structured lending. Great care
should therefore be exercised in your choice of arrangements.
Finance Links:
This links below will help you understand the
finance aspect of a purchase of a business.
