Reed Financial Group

The quality of business financing will directly effect the success of business opportunity investment strategies. Business finance strategies for business investments not involving real estate are more problematic than most borrowers expect, especially if investors are primarily familiar with real estate investing.

Buying a business opportunity is likely to be an extremely challenging task when arranging the business loan. This is largely due to the usual lack of commercial property as collateral for the business financing to buy a business. When buying a business that does not include commercial real estate, business borrowers need to realize that business loan options will be greatly reduced in comparison to a business purchase that can be financed with a commercial mortgage.

Business Opportunity Investment Financing Guidelines -

The guidelines and comments in this article are based upon business loan terms that are typically available from respected lenders willing to provide business financing for buying a business opportunity throughout the United States. There will often be various private financing scenarios in which the seller might be willing to wholly finance a business acquisition, and we will not attempt to discuss those commercial loan possibilities in this commentary.

Length of Business Loan to Expect When Buying a Business -

Business loan terms to buy a business will typically include a shorter amortization period than commercial real estate financing. A business loan term of ten years is normal, and that length of loan is likely to be tied to a requirement that the commercial lease will not expire before the loan matures.

Likely Interest Rates to Buy a Business -

In the current business loan interest rate environment, the likely range for buying a business opportunity is 11 to 12 percent. Because a rate of 10-11 percent is currently normal for commercial real estate financing, the rate for business borrowing should be viewed as quite reasonable. The commercial loan interest rate cost to purchase a small business is typically higher than the cost of a commercial real estate loan due to the absence of business property for collateral in a business purchase.

Down Payment Requirements -

Depending on the specific type of business and some other issues, a normal down payment for a business loan to buy a business is 20 to 25 percent. The presence of seller financing might lessen the down payment needed to acquire a small business opportunity.

Refinancing Options -

A related business loan issue to anticipate when buying a business is that refinancing the business opportunity loan terms will normally be even more difficult than the original business financing. There are several new working capital loan programs under development that could significantly change future choices for business refinancing. Until these new business financing alternatives are available, it is advisable to obtain the best financing terms when the business is initially acquired and not rely upon future refinancing choices.

Lenders to Avoid -

Perhaps the most important phase of the business loan process for buying a business opportunity is the selection of a commercial lender. In our view an even more critical stage of this process is avoiding certain lenders that are routinely unsuccessful in finalizing a business loan to buy a business.

By avoiding such lenders, commercial borrowers are likely to avoid many other business financing problems frequently associated with buying a business opportunity. Avoiding problem lenders will be instrumental to the eventual success of both the business loan process and the long-term financial health of the business being acquired.

By: Stephen Bush

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The secret in real estate business is to use other people’s money. This is how most real estate tycoons are made. Unlike traditional residential real estate mortgages, real estate financing offers much broader financial options, including lending or financing from various financial institutions. Transactions like these call for above-average negotiation skills.

It’s not advisable to invest your own money in a real estate as for a few very important reasons. First, you you tend to give most of your profits away by not leveraging your investment. Second, real estate is a very risky business – you don’t want to jeopardize everything you have.

This is not to say that real estate investment is all about losses. On the contrary. if you know how to make money work for you, you may actually garner a great deal of money in return for your investment.

Here’s how:

If, for example, you purchase a $100,000 property that increases an average of 7 percent per year (in reality that number could be higher or lower), you would see a net profit from renting your property resulting in an approximately 15 percent return.

If you’re content with little return of investment, you might settle with your 15 percent return. But if you really want to earn on your investment, consider the possibility of what leveraging can do for you. At present, a typical real estate investor can find financing as high as 95 to 97 percent of the purchase price. There even some instances where you may be able to get a 100 percent financing but we won’t use this for our example as it’s an inadequate comparison.

So, if you’re are an investor who is already content with a smallreturn of investment then 15 percent sounds like a lot. But for those who really want to make it big in the real estate, 15 percent is far from being considered a noteworthy return.

How does leveraging work?

Let’s assume that the rental income will cover all your expenses, including the mortgage payments. Taking the same example, a 7 percent appreciation of your property results in a $7,000 profit per year. With a 95% financing in place, you’ll be able to get a $7,000 return on $5,000 (your 5 percent down payment on a $100,000 real estate property). This will provide you with a 140 percent return on your investment. Not only that, with the same $100,000 you can go out and purchase 20 investment properties, finance 95% percent of them, and make an amazing $140,000 profit a year. This totally beats the $15,000 profit with an all-cash transaction.

In terms of the additional 20 properties, expect to have a hard time getting financing for them since usually only five or six new rental property mortgages are the maximum that lenders presently allow. Which is why you need to have an above-average negotiation skills.

By: Stu Pearson

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So now that you know what your basic plan is, it’s time to start getting a little serious and put some structure into your actions. The first thing you need to do is to get ‘pre approval’ for a loan. In other words you need to find a lender that suits your needs and get them to agree ‘in writing’ to lend you a certain amount of money to buy a Property. I remember when I bought my first property feeling completely over my head when it came to getting my finance into place. I had so many questions – most of which I managed to answer by trial and error. I will try to give you a detailed overview of all the question, problems and answers that I have encountered with getting finance.

Q. Why do I need to get ‘pre approval’ of a loan?

A. You don’t NEED to get pre approval but I highly recommend you DO for a number of reasons.

- Pre-approval will let you to know EXACTLY how much your budget is and therefore allow you to exclude properties that are out of your price range. This can save you valuable time.

- If you are competing against other buyers then having ‘pre-approval’ will definitely give you a big head start and allow you to take advantage of Vendors who are looking for a quick sale. Think about it – If you were the vendor and two people both offered you $350k for your house BUT one of them had ‘pre-approval’ whilst the other didn’t. Who would you choose? It’s a no brainer, there are even times when you offer $1k -$30k less than somebody else and they still choose you. Why? Because for one reason or another the vendor needs to sell straight away and they can’t wait to find out if the other offer will be approved.

- Keep STRESS to an absolute Minimum. There is nothing worse than having your offer accepted and then having to wait for the bank to make their decision. This is especially the case if you haven’t got a home loan before or are self employed.

Q. Should I use a Mortgage Broker?

A. Yes, a good mortgage broker should save you thousands of dollars and help you get a loan easily. If you are buying your first property then you will appreciate as much help as you can get. Mortgage brokers deal with banks every single day and they should know how to get you a loan and more importantly WHAT loan to get. Have you noticed that there are a million different loan options these days? A good mortgage broker will know which one suits your situation and save you lots of time and money. Always do your own research but if you find someone who you trust you should have no problems. Best of all you don’t even have to pay them; the bank will do that on your behalf. So really there is no reason NOT to use one. Just remember find a Broker who you trust and get along with.

Q. What sort of loan should I get, and what does Interest only mean?

A. The best person to advise you on this is your broker but generally speaking Investors only ever use Interest only loans. What this means is that they will never own the house outright, instead they make smaller repayments that only cover the interest bill. This can be a crazy idea to get your ‘head around’ at first but the reason is quite simple. The lower your repayments are on your property the less restricted your cash flow is, therefore you have more excess money to help finance your next investment property. The logical question is – but if you never pay off the house how can you make any money? As we learnt in Chapter 1, you can still access the equity in your property without selling or completely paying off the house (see chapter 8 for more details). It’s also worth mentioning that the Interest component of an Investment loan IS tax deductible whilst the principle repayments are NOT, just another reason why Professional investors always use Interest only loans.

Q. Should I fix my Interest rate or leave it variable?

A. I have a basic rule or recommendation when it comes to this question. When you first see banks raise their long term fixed rates you know it is time fix your loan. Using this rule and some common sense you should be able to work out what’s best for you.

Q. How much do I need to save for a deposit?

A. Once again it depends on your situation and circumstances. A ‘normal’ property loan would include a 20% deposit but professional investors will always try and pay as little deposit as possible. So, would I recommend getting a 95% loan? With caution and common sense, yes I would – BUT every situation is different and I obviously wouldn’t recommend for someone who is earning $20,000 a year to get a 100% loan for a $500,000 property. Use your common sense whilst doing everything possible to make it happen for you. The worst feeling in the world is when you have saved a decent deposit but decide to wait another 6 months to save that extra little bit only to find out that house prices have risen and your deposit is now effectively worth less than it was 6 months ago.

By: Banjo Smyth

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