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 opportunity. 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.

The suggestions and advice in this commentary build upon commercial loan covenants that are commonly provided by commercial lenders willing to offer commercial financing throughout much of the United States for buying a business opportunity. There will often be various private financing scenarios in which the seller might be willing to wholly finance a business opportunity 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 Opportunity

When purchasing a business opportunity, commercial loan terms will almost always include a reduced amortization period in comparison to a commercial real estate loan. 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 Business Loan Interest Rates to Buy a Business Opportunity

The likely range to buy a business opportunity is 11 to 12 percent in the present commercial loan interest rate circumstances. This is a reasonable level for business opportunity borrowing since it is not unusual for a commercial real estate loan to be in the 10-11 percent area. Because of the lack of commercial property for lender collateral in a small business opportunity transaction, the cost of a business loan to acquire a business is routinely higher than the cost of a commercial property loan.

Business Loan Down Payment Requirements for Buying a Business Opportunity

Although there will be variations based on the type of business and several other factors, a common down payment requirement for a commercial loan to buy a small business opportunity is 20-25 percent. The presence of seller financing might lessen the down payment needed to acquire a small business opportunity.

Buying a Business Opportunity – Business Loan 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 currently some new business loan programs in the final stages of development that could dramatically improve future refinancing options. But until these new business financing options are finalized, it is important to arrange the best possible terms initially and not depend upon refinancing possibilities.

Avoiding Problem Lenders When Buying a Business Opportunity

The selection of a commercial lender might be the most important phase of the business financing process for buying a business. An equally important task is avoiding lenders that are unable to finalize a commercial loan for buying 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.

Copyright 1995-2007 AEX Commercial Financing Group and Stephen Bush. All Rights Reserved.

Many business borrowers do not prepare adequately for the commercial mortgage business loan problems that are common in most business financing scenarios. By anticipating typical commercial loan difficulties, business owners are more likely to avoid potentially disastrous business finance consequences.

With rapidly deteriorating financing for residential investment property, overcoming business loan and commercial mortgage problems is even more important. This summary provides an introduction to four critical commercial loan factors and should assist commercial borrowers to better anticipate key business financing difficulties.

It is not unusual to find that business investment lenders and business loan brokers are not as forward-looking about business financing and investing difficulties as most borrowers would expect, and I have published another article about commercial lenders to avoid. The focus here is on four typical commercial mortgage loan and SBA business loan difficulties often overlooked by commercial lenders and borrowers.

Commercial borrowers should be prepared for commercial loan scenarios that involve unexpected business financing problems. With business financing there are several key commercial mortgage problems which should be avoided. Business loan problems are more serious and prevalent than many borrowers would imagine.

Some of these commercial mortgage business loan difficulties might be unavoidable, but in most cases these business financing and SBA loan challenges can be successfully overcome. Commercial borrowers will be poised to take proper corrective action if they are aware of common commercial loan difficulties.

Avoidable Commercial Real Estate Investment Property Financing Scenario Number One: Use of secondary business financing -

Many commercial borrowers want the flexibility to use subordinated debt (a seller second or other secondary financing) in order to acquire a commercial property or business opportunity investment with a smaller down payment. Many forms of business investing will not permit a seller second or other forms of subordinated debt. With a commercial loan via non-traditional business lenders, a commercial borrower can use subordinate business financing (including seller seconds) to reduce the amount of their down payment.

Commercial Mortgage Example Number Two: Sourcing-seasoning assets and seasoning of ownership -

Some commercial lenders will require borrowers to document the source of the down payment for a purchase (sourcing). Many business lenders require borrowers to document where down payment money is coming from, often for up to 12 months in order to provide seasoning confirmation. Ownership seasoning is determined by establishing a minimum period for ownership prior to being eligible for refinancing.

Such a problem will probably not deter all borrowers. When it does apply, business borrowers should insist on a lender without seasoning and sourcing requirements.

Business Financing Example Number Three: Commercial mortgage recall terms -

Business loan recall conditions will often allow the commercial lender to force the borrower to repay their loan before the normal loan expiration. If a commercial loan agreement does not include recall terms, such a possibility is not of immediate concern to a borrower.

Commercial lenders will routinely include recall conditions in a business loan agreement. The provisions which will prompt a recall will vary and typically include annual business lender monitoring of financial statements, tax returns and credit history. Without agreed income, tax returns and credit standards, the lender can choose to require the borrower to pay off the commercial loan within a very short period of time.

Contingency Plans for Business Finance Recalls: What to do about a commercial loan recall -

To avoid an unanticipated recall scenario, commercial borrowers would be wise to consider only commercial loans which do not have recall terms. For commercial borrowers who have recall provisions in their business financing agreement, it will be equally wise to consider refinancing their business loan or commercial mortgage before a recall occurs so that refinancing is accomplished when it is most appropriate for the borrower.

When borrowers receive a business financing recall, they must quickly obtain refinancing assistance. When reviewing commercial loan choices for refinancing, borrowers should attempt to exclude potential lenders that require recall terms.

Business Loan Example Number Four: Business financing that needs a long-term commercial loan -

Is long-term investing and financing really possible for a business loan? Some business investment lenders will only offer 5 years (or less) before commercial real estate financing will expire with a balloon payment due.

There are commercial mortgage programs which can provide long-term financing, even though many lenders will only offer shorter-term options for investment business financing. Longer-term commercial real estate financing will often be the critical difference that facilitates a successful business investment because a new business loan will not be required for many years and commercial loan payments will also be reduced.

Additional Commercial Loan Problems and Solutions -

Unfortunately commercial borrowers will frequently encounter commercial mortgage business loan problems similar to those described here. To better prepare for this, an advisable approach is to explore business financing resources that will facilitate a better understanding of complex commercial loan issues. The Commercial Real Estate Loan Guide and The Working Capital Management Guide are two examples of business finance resources that will provide possible solutions for many difficult commercial financing situations.

The choice and diversity of mortgage packages being offered to borrowers has increased dramatically in recent years to cater for the modern mortgage market. Most high street lenders offer some find of flexible or offset mortgage in their product range. Below is a quick guide to some of the main types:

Flexible Mortgages

Essentially a flexible mortgage is a secured loan that can be repaid in varying amounts. The interest is calculated on the fluctuations of the outstanding balance and while a flexible mortgage has a higher interest rate, the ability to make overpayments and lump sum payments means the mortgage can be paid off earlier.

Offset Mortgages

Offset mortgages basically use the interest from your savings account against the interest charged on your mortgage. Usually your mortgage provider will combine your mortgage and savings account into a single account. Each month, the amount you owe on your mortgage is reduced by the amount you have in your account, before working out the interest due on the mortgage.

Current Account Mortgages

Current account mortgages have been around for well over 10 years in the UK and are a type of flexible mortgage. Current account mortgages work by combining your mortgage and current account into a single account, usually with the same financial institution. The balance is calculated daily and the home owner only pays interest on the balance. Any saved income you have in your current account at the end of the month is automatically deducted from the mortgage debt you owe.

Flexible Loans

A loan for building a home is known as a ‘self build mortgage,’ and there are several different types of self build mortgages currently available in the market place. Recently, home buyers who want to build a property for themselves or for investment purposes opted for flexible loans. A self build mortgage is different from a traditional mortgage. The money is released in stages and to acquire a self build mortgage, the providers will want to see plans, timescales and the end-value of the property as well as enthusiasm for the project.

Self Cert Offset Mortgage

A self cert offset mortgage combines the benefit of declaring your own income with the freedom of an offset mortgage that allows over payments, lump sum payments, under payments, and payment holidays.

Offset Tracker Mortgages

Offset tracker mortgages are relatively new in the market place. They combine the benefits of an interest rate that tracks the Bank of England’s base lending rate, with the ability to ‘offset’ the interest earned on savings and current account against the interest charged on the mortgage.

Flexible Tracker Mortgages

Flexible tracker mortgages offer the benefits of two types of mortgages rolled into one. The mortgage not only offers financial control due to different repayment options, the mortgage interest rates tracks the Bank of England Base Rate.

Cheque Book Mortgage

A cheque book mortgage main feature is that it is designed to be user friendly. All your savings, debts and mortgage are rolled into one account, with the same financial institution, for easy management of your finances, and the mortgage is flexible, which is an attractive feature for many borrowers.

Discount Offset Mortgage

A discount offset mortgage is an offset mortgage with a discount on the standard variable rate of interest for a set amount of time.

Conclusion

With such a wide array of mortgage products available it’s important you shop around and seek the advice of an independent mortgage broker. Understand the features, benefits and negative aspects of each option so that you are equipped with the knowledge to select the package that best suits your specific personal circumstances.