How Hard Is It To Get a Bank Loan to Buy a Small Business?.

In these times of financial austerity, high street bank lenders have very little choice but to strictly apply the tough business lending policy set out by their head office. Nevertheless, banks are in the business of providing business loans, from which they expect to make a profit, and are encouraged by governments to support new business owners. 

So if you are looking for a bank loan to buy a small business, the most important issue is to supply all the information requested by the bank, and take care that your loan application conforms to what they are looking for – especially in certain key areas. 

Be crystal clear about the purpose of your loan 

You must show you have a clear direction for the small business you want to buy, and demonstrate precisely how the bank loan will fit into that template. Above all, that means drafting a coherent business plan which illustrates exactly how your loan will be spent and indicates how you will achieve the anticipated returns on that investment.

Please avoid submitting a loan application designed to pay yourself a wage or to “tide you over before things pick up”. The most important consideration here is your plan must be recognised as focused and authentic. 

If you can’t show how the loan will help you to start generating profits, then it’s almost certain your application will be rejected. The substance of your content is key, but a tidy and concise document looks more professional and will certainly better support your cause. 

Show how the business will generate loan repayments

Your bank will want to be sure you can manage the loan repayments. That means you must provide cash flow and profit forecasts for the business you will own. Your chances of securing a loan will be much enhanced if you can show how you plan to grow the business. Here, it’s important to consult your accountant who will guide you as to how these figures should be presented to maximum effect. 

Your business experience in your chosen sector will be equally important. Thus, your bank will be keen to learn what expertise you have and how it was acquired. And if you plan to employ a management team, it will be important to relay information about their abilities too. 

Those vetting your loan will want to see that you plan to invest in training, because that shows your intentions over the longer term. With these measures you will be seeking to build confidence that you have thought through how to invest the loan monies, and thus prove you understand what it takes to run a successful business. 

Consider reducing the bank’s exposure to risk 

Banks make money through business lending, but they understand the risks of doing so better than anyone. Recovering money from debtors is always expensive, especially following the credit crunch, so there are advantages to making life easier for the bank – including the real possibility that you may qualify for preferential terms.

One option is to offer some collateral security. The possibilities here include offering some of the business assets you plan to buy with the loan. However, not all banks will be prepared to agree to this. Another possibility is to offer your home as personal security, and some banks may stipulate this as a requirement in any event. 

The second option is to introduce some equity into the business. So, for instance, if you can demonstrate that you are willing and able to loan your own money to the business, this gesture will be well received. 

From the bank’s perspective, if you are happy to risk your own money, they will usually conclude you have faith that your business will do well. A typical arrangement might be for you to invest around 50% of the amount you are asking from the bank from your own funds. 

Apply to other lenders too 

Don’t just stick with your usual business banker, make sure you shop around for the best deal. Some banks will run special promotions from time to time or may have a specialist interest in your business sector. 

Anticipate stringent terms

Banks are likely to impose strict conditions about how, when and where you spend the loan resource. You must be prepared to follow such conditions, which may include arranging adequate business insurance, agreeing not to sell off any capital purchases you make with the loan, and maintaining a healthy business cash flow, because otherwise that could give your lender grounds to demand immediate repayment of the outstanding loan amount. By Matthew Hernon is an Account Manager at Dynamis looking after Business Transfer Agents and Franchises across BusinessesForSale.com and FranchiseSales.com.