This article has been written for New Zealand businesses and makes reference to banks in New Zealand.
The amount that banks are prepared to lend depends on a number of factors including the security you have to offer and your capacity to fulfil your repayment obligations.
The more successful your business is, and the stronger your cash flow - the more the bank will be willing to lend.
How much can I BORROW for my business?
1) Generally the banks will lend between 35% and 65% of the purchase price of the business.
2) If you are buying a reputable franchise it could be from 50% to 75%.
3) A stand alone business can be more towards 35% or possibly more.
What BANKS look at when you apply for a business loan:
• Type of business,
• Management systems,
• Past performance trends,
• Cash flows,
• Your experience in running the business,
• Goodwill and fixed assets are also taken into account.
% Interest Rates
It is important to note:
- Interest rates are lowest for loans secured by residential property,
- Higher when secured by commercial property, and
- Possibly even higher when secured by business assets, with no other collateral.
Security
Banks tend to lend 50% - 60% of collateral security to specialist businesses such as hotels etc. The servicing of the debt from business and other resources needs to be to the banks satisfaction.
Your Business Loan VS Your Home Mortgage - being smart with your structures
Businesses that have been running for a number of years would have arranged their banking facilities and securities on day one. As time goes by and the business has progressed, there is a chance of separating business and personal assets by re-structuring the finance between bank and non-bank lenders at the same competitive rates.
Scenario
Bank 'A' had cross collateralised the client's home, investment house, beach and commercial property as security for the business' overdraft, term loan and their personal facilities, including credit cards. Simply, all lending facilities were secured by all available property including the family home.
The clients required further facilities for a business acquisition and the bank declined the request. The clients found an experienced mortgage broker, who reviewed their finances isolating their business loans from their personal debts and refinanced the residential properties with Bank 'B', repaying this current bank in full. This left the commercial property debt free to allow a mortgage to acquire further products.
TOP TIP
Whether you are considering buying a new business or have been in business for many years - find an experienced mortgage broker who deals with business owners, and complete a review of your current loans structures. This may help you with your cash flow and save you money.
Co-Author Gary Hey, Mortgage People, Auckland, New Zealand.
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