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Borrowability Can Be the Key to Deciding How to Become an Entrepreneur

Peter Siegel, MBA


Contributed by Peter Siegel, MBA

In the controversy over how best to get into business ownership--buy an existing enterprise or start from scratch--the most important and most overlooked aspect is whether you can “take it to the bank.”

As people emerge from corporate employment, or from school, looking to be in business for themselves, many wrestle with this question. The benefits of taking over a going concern, including a track record with exiting customers, employees and vendors, plus a known name and instant cash flow, are up against the reasons to launch an enterprise: You don’t have to buy goodwill, and can enjoy the pride of having created a running business from just an idea.

Often forgotten in this debate is that no matter which strategy is pursued, if money is needed to make it work, the far better option is to find a business for sale to purchase. That’s because the entrepreneur planning on finding a suitable business offering has a greater chance of getting the help of a lender, than the person who asks for funding to carry out a business idea.

Here are a few reasons that “borrowability” is greater when an existing business is involved, and suggestions for using the reasons in the campaign to get a business loan.

1. That track record of an established company, even if it isn’t perfect in every respect, will open banker’s doors more readily than an idea about what “could be.”

Suggestion: Borrowers are advised, when requesting financing, to provide a business plan that summarizes the company’s performance during the past few years so any interested loan officer can be satisfied that the enterprise is equipped to keep clients, manage expenses and show a return.

2. Expectations for the future are the companion to the track record.  The would-be borrower stands little chance of getting funds for a start-up because the business projections are based on the borrower’s speculations. Lenders only survive if they’re very careful to avoid risky propositions. So a loan granted to an owner who can’t rely on past experience to guide the company’s way into the future, often looks, from the viewpoint of a bank, like a gamble.

Suggestion: Any buyer seeking funds to complete a deal should consider how to show prospective lenders that positive trends observable in the company’s recent past will help give direction for the future, and any parts of business that have been a disappointment--income areas with poor results, and expense items that seem too costly--are subject to change going forward.

3.  A common feature in many transactions involving the sale of a small business is seller participation by carrying back part of the purchase price.

The willingness to sell a business by providing financing sends a signal as clear as a green light for other lenders to proceed. It’s reassuring for the loan officer to notice that the person who knows most about the business is staking money on the buyer’s chances for success.

The start-up operator has no similar way to demonstrate to prospective sources of borrowed funds that their decision to participate probably involves little risk.

Suggestion: Here’s a negotiating point when persuading a seller to help finance: Such a demonstration of faith in the buyer will increase the likelihood that another lender will be ready to provide the cash needed to complete the deal.

Future business owners not sure whether to pursue a start-from-scratch plan or buy a business, ought to give serious consideration to the “borrowability” factor.
 

 

About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.

Posted on June 5, 2010  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Peter Siegel, MBA

 Categories: BizBen Blog Contributor, How To Buy A Business
 

Comments:

Don't know if a track record is always the most important consideration. If a borrower has great credit and plenty of assets to back up the promise, that person will find lenders who are willing to make the loan. There are so many factors. Small banks usually want to work with businesses in their community and they will look at all the factors. If the loan officer knows the business, it really helps the buyer get a loan. Many of the big institutions just want to get money out and get payments coming in and will get involved in more questionable deals. The loan officers have their quotas. They don't worry so much whether the business will succeed. But there better be plenty of assets and money so they can avoid taking a loss if the borrower can't pull it off.

Posted by: David H.

It still is hard to get a loan for a business purpose. Even for expansion for a business with good track record. Some banks might be motivated to help someone starting up because it means they can get new business, checking account, credit card service and so forth. But between the two, it's better to have a business already up and running when you go for a loan. And if the seller will be financing, that is icing on cake.

Posted by: Lawrence Ing

There are exceptions. I know of a guy who had left his company but then had a contract with them to continue providing services. On the strength of that proof that he had some good business coming in to start his company, he was able to get a loan to get an office and set it up and start promoting the new business. But I think in general, it's a lot harder to get money for a start-up than when you're buying a business. Especially if it is profitable. And especially if the seller will carry back, like you mentioned.

Posted by: Ron F.

How do you compile these figures? What percentage of certainty to you put to these?

Posted by: Roy Moss, Empire


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About This Blog
Peter Siegel, MBA is a nationally known consultant and author - with over 25 years experience on the topic of selling, buying, and niche financing (the purchase of), small to mid-sized businesses. His clients include: business buyers, business owners/sellers, small business advisors, and business brokers.
This Blog contains observations, tips, news, events, and case studies relating to selling or buying a small business.
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