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Prequalifying Your Business for Bank Financing in Ten Minutes
70% of small business sales involve some form of seller financing. Less than 5 to 10% of business sales involve bank financing. Why is bank financing so hard to get? How do I know if my business qualifies for bank financing?
Why is bank financing so difficult to get for small business sales?
There is one main reason that bank financing is rarely involved in small business sales. Take a wild guess…
Small business owners hate paying income taxes and do everything they can to reduce their income taxes. They do this by either not reporting all the income, or by deducting a lot of expenses to minimize the income.
Banks have to follow guidelines and procedures. Banks have specific procedures when pre-qualifying a small business for a loan (acquisition). The first thing they request is the Federal Income Tax Returns for your business.
Here is how their calculation works: (Example)
|Pre-Tax Net Profit from Tax Return||$22,000|
TOTAL INCOME AVAILABLE TO PAY DEBT SERVICE: $58,000
Less Debt Service (for bank loan): $23,000
Less cushion on debt service (25% cushion): $5,750
Income left over for buyer to live on: ($29,250)
This is a very typical example for most small businesses. The buyer must be able to live on the income left over using the calculation above.
Will lenders only look at my tax returns when considering my business for financing?
Typically, yes. There are some exceptions, such as for a medical practice. However, 90-95% of the time, the banker will primarily base their decision on your tax returns. If your tax returns do not show enough profit to cover the debt service, and enough for the buyer to live on, plus a cushion, then it is unlikely your business will qualify for a bank loan.
Are there other financing sources available for buyers?
Yes. Buyers can often access their retirement funds tax-free to buy a small business. Contact us for details on how to do this; this is very technical.
Several years ago, it was very common for buyers to use their home equity for a down payment on a business. However, this is rarely the case.
If the buyer is a veteran, he/she may qualify for a VA Loan.
For additional information, feel free to call us at 888-693-7834 x-101. If you fax us your Federal Tax Returns, we can quickly look at them and determine if your business may qualify for bank financing.