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School me on loans

Discussion in 'Stocks & Investments' started by RAT PRODUCTS, Oct 27, 2014.

  1. Oct 27, 2014 at 3:54 PM
    #1
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    I'm looking to invest in a business. I have a 1-man shop right now (1.5 year startup) and want to expand. I plan to buy an established business that I can potentially grow with my current business, as well as secure the steady work already coming in to the established business.

    I've been doing quite a bit of research on small business loans and have a fair understanding of how it all works, but short of going to the bank and getting shot down by the lender, I would like to know how I know what sized loan I would qualify for, the down deposit required, terms, etc. I'm thinking a SBA Express Loan is what I would get, but maybe there's a better option. I would like to get a loan up to $300k if I can. I have about $25k in total assets, own no property, and about $10k cash I could spare at the moment. Not a very strong backing, but gotta start somewhere. I've read that some loans let you leverage against the assets in the new business, which is over $300k with the equipment, building, and land.

    Anyone have an idea of where I would stand with a bank or suggestions, etc?
     
  2. Oct 28, 2014 at 11:58 AM
    #2
    T Fades

    T Fades Well-Known Member

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    The bank will look at your debt:income ratio.

    Also, are you setup as an LLC?
     
  3. Oct 28, 2014 at 3:23 PM
    #3
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    I am an LLC. I would move my current business and combine it with the new venture.

    Some more info... The business I am pondering is listed for $299k. However, the business is only valued at $70k. It includes a 4000 sq ft building that is part shop, part 2 br 1 ba living quarters. It sits on 2.8 acres of land.

    Based on the value of the business, I'm guessing there's no way I could get a loan for $250k+. However, if I can leverage the property into the loan I might be able to pull it off. I'm waiting to hear back from the broker on what the property is worth.
     
  4. Oct 28, 2014 at 3:29 PM
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    Willie B

    Willie B Well-Known Member

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  5. Oct 28, 2014 at 3:30 PM
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    teamcurtis

    teamcurtis Well-Known Member

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    how long have you been in business? how many years have you filed business returns?
     
  6. Oct 28, 2014 at 3:32 PM
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    T Fades

    T Fades Well-Known Member

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    I'm not sure, but the bank may not finance more than the valued $70k.

    Good luck OP.
     
  7. Oct 28, 2014 at 3:33 PM
    #7
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    :thumbsup: I'm actually meeting with a business counselor through the local business college on Monday. I want to go well prepared with all the info already in hand.

    1.5 years. Last year was the only year I filed business returns, this year will be the 2nd. I am working on getting everything totaled so far for this year.
     
  8. Oct 28, 2014 at 3:35 PM
    #8
    PB65stang

    PB65stang Well-Known Member

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    The bank and SBA are going to look at loan-to-value, debt service coverage (in other words, how many times do your earnings pay your debts), and prospects for future cash flow.

    The preferred collateral type is going to be real estate, bar none. Especially for a new business owner with no real established history of a business this size. If the real estate is worth the $300M by itself, combined with the value of the machinery and equipment, you may have enough collateral. Look into SBA 504 and 7(a) programs to see if you can find one that works the best for you. Not all banks do SBA loans, so you may have to look around to find one.

    As far as cash flow, the above person who mentioned debt to income is correct, for a personal loan. This is considered a business loan, which uses a calculation called "debt service coverage". Basically, the bank will take your EBITDA or NOI, and figure out your ability to service principal and interest payments on the proposed loan. It must at least be 1:1, most prefer at least 1.3 or 1.4:1. For instance:

    Let's say you get a loan for $300k, 20 year term, at 5% interest. The monthly payments would be about $1,980. Total debt payments for the year are $23,760. The bank is going to look for your business to make about $30,000 a year, before interest, taxes, depreciation, and amortization (since D&A are non-cash expenses). Does your business do this? If not, you're probaby screwed.

    Good luck, let me know if you have any other questions. I actually review loans like this at the banks to make sure they're appropriate, that you as the borrower can repay, and that the bank won't lose any money. So I see these kinds of things everyday.
     
    Last edited: Oct 28, 2014
  9. Oct 28, 2014 at 3:38 PM
    #9
    teamcurtis

    teamcurtis Well-Known Member

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    most lenders are going to want to see at least 3 years in business to lend to the business.
    beyond that you are going to essentially take the loan out in your name.

    banks are cashflow lenders... meaning that if they don't think you can easily make payments they don't want to take the note
     
    Last edited: Oct 28, 2014
  10. Oct 28, 2014 at 3:40 PM
    #10
    PB65stang

    PB65stang Well-Known Member

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    And no bank is going to lend on a personal loan for $300,000 with no bankable assets as collateral. It's just not going to happen.

    Many banks will look at the income of the business for sale and consider that when looking at the ability to service the debt. After all, you're buying an established business, not starting a new venture.
     
  11. Oct 28, 2014 at 3:42 PM
    #11
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    My understanding is that by buying an established business, the bank will look at the earning of that business, not mine. I know my business has no leverage, but this business has been around for 11 years now and has customers coming in daily. The current owner is an older man and doesn't work too hard to earn a buck, so he is content with $70,000 a year. I would plan to take it to the next level with lots of hours and hard work.
     
  12. Oct 28, 2014 at 3:45 PM
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    teamcurtis

    teamcurtis Well-Known Member

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    I missed the established business part....
    that's going to be an incredibly tough sell.

    they bank isn't going to take on that kind of liability on the assumption that you know more about the business than the current owner.
     
  13. Oct 28, 2014 at 3:46 PM
    #13
    PB65stang

    PB65stang Well-Known Member

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    OK, so you're saying 2 different things. Your first comment was that the business is worth $70k. Now you're saying it makes $70k a year.

    If the business truly cash flows $70k a year, that would put it's worth around somewhere of $550-$800k. If you want to know how that's figured, I can show you. But first we need to establish if it's WORTH $70k or MAKES $70k.

    I'm asking you these questions now because a banker is going to do the exact same thing, only with a lot more scrutiny, and you need to know (and show documentation supporting) the answers. I also want you to get correct information regarding what the bank is going to look for.
     
  14. Oct 28, 2014 at 3:46 PM
    #14
    PB65stang

    PB65stang Well-Known Member

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    This is inaccurate. This is actually a much EASIER loan for a bank to approve than a new business.
     
  15. Oct 28, 2014 at 3:48 PM
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    teamcurtis

    teamcurtis Well-Known Member

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    let me know when he signs loan docs
     
  16. Oct 28, 2014 at 3:51 PM
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    PB65stang

    PB65stang Well-Known Member

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    I'm not saying his loan will be approved, because quite honestly we don't know his entire financial situation, nor have we seen the business financials.

    But I do this for a living...I look at these things every single day. Banks are much happier to finance the sale of an existing, established business with proven cash flow to a new owner (especially with experience in the industry) than having Joe Blow walk in off the street and say "Guess what, I wanna open a business. I've done it for 3 years on a much smaller scale. It's gonna be super successful, so trust me." It just doesn't work that way.
     
  17. Oct 28, 2014 at 4:09 PM
    #17
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    The current owner of the business values it at $70,000 in his eyes. However, gross revenue was between $60-70k the last 3 years. He won't tell me cash flow numbers until I go sit down with him face to face. So far it's been just over the phone. I'm not ecstatic about the business itself, but the property, equipment, and inventory would make a good base to adding some contract work or something.

    I found out the property is valued at $252,000 according to a website, but he paid property taxes on $320,000 in 2014.
     
  18. Oct 28, 2014 at 4:19 PM
    #18
    PB65stang

    PB65stang Well-Known Member

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    What kind of business is it? And you may not be ecstatic about the work, but it may very well what keeps the lights on.

    I guess I am a little confused now - do you want the business and its customers, or do you want the property and the building? Two very different things.

    $70k in gross revenue isn't great. Assuming 75% expenses, your net is about $17,500. Add in the things I mentioned earlier, and it may break even. That's going to be a harder sell.

    Bottom line, you and your lender will need to see his financials before you really know anything.
     
  19. Oct 28, 2014 at 5:12 PM
    #19
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    Metal fabrication and welding. He does a lot of marine type work. Fixing docks, lifts, trailers, etc. It's in the Minnesota heartland of lakes. I want the customers for now (lets say the next 5 years), since they are paying, but would add in other opportunities to expand.


    There are other options I'm weighing also. Companies that range from $40,000 to $500,000 cash flow. This one happens to be pretty much exactly what I'm looking for as far as location, being able to live where I work, and the tools and equipment included are worth a fair amount.
     
    Last edited: Oct 28, 2014
  20. Nov 19, 2014 at 4:11 PM
    #20
    RAT PRODUCTS

    RAT PRODUCTS [OP] Well-Known Member

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    Update!

    The seller is going to finance the business for me. I need to come up with a decent down payment, but he is willing to carry the rest of the loan. He uses the business for tax deductions for his farm, so he wants to keep them as long as possible. I will consider a loan to pay off the rest of the business after I have been operating for a few years.

    If you would like to know more about the potential business, check out this link where I laid out my future goals and some financials. You don't need to donate, unless you really want to I guess. It's just the most convenient way to post the details.
    http://fnd.us/c/4u3Sa/sh/04Ebad
     
    Last edited: Nov 19, 2014

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