Commercial Loans for Business Purchase

[mbiman]

Apologies if this is one of those how long is a piece of string questions

Assuming I had £300k cash (no other security) how much could I raise (commercial loan) to buy a business - Assuming it was well established, for sale at 6-7 time P/E & leasehold.

Cheers

PS I know there is the VC route however the monies are likely to fall well short of their normal £2 million starting price
Do you start with the High street banks ??

[spydersingh]

I'm in a similar situation! I tried HSBC today, speaking to a more senior commercial chap tomorrow. One interesting point is that they won't lend you money for the "goodwill" of the business but will do for the actual commercial property.

[mogul]

spydersingh said:

I'm in a similar situation! I tried HSBC today, speaking to a more senior commercial chap tomorrow. One interesting point is that they won't lend you money for the "goodwill" of the business but will do for the actual commercial property.

I assume they would lend you money for goodwill if you offer security?

[lambogenie]

this is really really hard, trust me, even with 300K in your pocket trying to get a loan secured on a non freehold business is almost impossible.

there are a few specialist business lenders you can try, speak to christie (the pub and business brokers not the art auctioners) as they have a commercial finance division.

Don't waste your time with the high street banks, the local business managers are a joke for money raising, until you get into corporate banking 1 million plus they simply have a complete risk aversion, we had a cast iron business plan for a existing profitable business and a substantial cash injection and a board of top business sorts and HSBC, RBS, LTSB all said it "wasnt viable" and they werent interested without security to 100 percent of the loan, even the small firm loan scheme is a waste of time, they take anything up to 2 years to process your application and won't fund most business takeovers.

given the current credit climate you are really going to struggle to raise money on a non secured business, VC is more for business start ups or tech companies with some IPO potential.

Your best plan is try and find some willing partner investors with the required cash, i would have a look at business angel type networks see if you can find someone with your shorfall to take a punt.

a word to the wise, the reason why banks wont lend on "goodwill" premimums is because in reality they are worth sweet F.A - the same as "lease premimums". having looked over a couple of dozen businesses with substantial premimums on leaseholds very few of them were capable of delivering a R.O.I within the 3-4 years that the banks would expect, generally the premium should be no more than the profit generated during the first 3 years of the lease assuming security of tenure.

good luck to you, be sure you want to waste your time on this, i spent 2 years trying fund a business takeover with a couple of partners as a sideline venture, and was astonished how difficult it was, we can raise 20 million in 6 months for our core R and D business but trying to get even 10K out of a bank is like getting blood out of a stone and everyone said the same thing, for a leashold business they want personal security for the value of the loan.

[Seany88]

lambogenie said:

this is really really hard, trust me, even with 300K in your pocket trying to get a loan secured on a non freehold business is almost impossible.

there are a few specialist business lenders you can try, speak to christie (the pub and business brokers not the art auctioners) as they have a commercial finance division.

Don't waste your time with the high street banks, the local business managers are a joke for money raising, until you get into corporate banking 1 million plus they simply have a complete risk aversion, we had a cast iron business plan for a existing profitable business and a substantial cash injection and a board of top business sorts and HSBC, RBS, LTSB all said it "wasnt viable" and they werent interested without security to 100 percent of the loan, even the small firm loan scheme is a waste of time, they take anything up to 2 years to process your application and won't fund most business takeovers.

given the current credit climate you are really going to struggle to raise money on a non secured business, VC is more for business start ups or tech companies with some IPO potential.

Your best plan is try and find some willing partner investors with the required cash, i would have a look at business angel type networks see if you can find someone with your shorfall to take a punt.

a word to the wise, the reason why banks wont lend on "goodwill" premimums is because in reality they are worth sweet F.A - the same as "lease premimums". having looked over a couple of dozen businesses with substantial premimums on leaseholds very few of them were capable of delivering a R.O.I within the 3-4 years that the banks would expect, generally the premium should be no more than the profit generated during the first 3 years of the lease assuming security of tenure.

good luck to you, be sure you want to waste your time on this, i spent 2 years trying fund a business takeover with a couple of partners as a sideline venture, and was astonished how difficult it was, we can raise 20 million in 6 months for our core R and D business but trying to get even 10K out of a bank is like getting blood out of a stone and everyone said the same thing, for a leashold business they want personal security for the value of the loan.

Is it gross or net profit that they use in relation to the good will premium?

[m4tt]

You have mail.

[mbiman]

thanks all (inc Matt for the PM)

Bit shocked at the response (although I respect the opinions of those more in the know than I)

So if I have this right (as an example)

If there is a business making £250k pa, is well established 3 plus years trading and for sale at £900k

Banks wont lend £600k against it

This equates to less than 2.5 times earnings and 66% leverage ratio

I would assume the repayments on this type of loan (over 10 years would be no more than £85k @8%) so again equates to less than 30% of earnings

Yet they will lend to someone in the US who has just got of prison, has no job and whose home they have never even bothered to visit and value

I don’t have a business in mind but fancied seeing how it would work as an option – guess I need to keep saving or use the money to pay a chunk off my mortgage

Once again thanks for the feedback

[srebbe64]

Entrepreneurs are interested in profit lenders are interested in assets. As such, to get a loan of any type without linking it to assets can be tricky. Obviously VC's will but they'll want equity in the business.