Commercial borrowers should be able to obtain improved
business opportunity investment loan terms and avoid
potentially devastating business finance problems by taking
some precautions as noted in this article. Avoiding
critical business loan mistakes is an especially essential
requirement in securing appropriate business financing
terms when real estate is not involved.
A key factor that distinguishes business opportunity
financing from other forms of business financing is the
lack of commercial property ownership. Although the
transaction will usually involve a long-term lease
agreement, the buyer is acquiring a business that does not
include real estate in the purchase price.
In our experience, the potential difficulties involving
factors discussed below are more serious and common than
most business owners expect. While we will not be
addressing all possible business opportunity financing
problems in this article, we will include two of the most
severe issues to anticipate and avoid.
Length of Business Financing -
A common mistake when acquiring a business opportunity is
to finance the acquisition with business financing that
expires within two to five years. One reason for this
occurring is the failure to negotiate a longer-term lease,
since it is typical for financing terms to expire with the
lease.
A viable solution is to insist on a lease that is at least
ten years long. This will facilitate business finance terms
that can typically be for a ten-year period. It should be
noted that the lack of real estate as collateral is a
primary reason for most business opportunity financing
being limited to a maximum of ten years.
Use of Excessive Seller Financing -
Although nominal seller financing (such as 10-20%) can be
helpful to a business financing transaction, attempts to
finance either entirely or primarily with seller financing
are generally inadvisable. There are several different
issues which can result in this being a serious mistake.
If a seller is providing most or all of the business
acquisition financing, a formal appraisal might not be
obtained. While this appears to offer the advantage of
saving the cost of such an appraisal, it also eliminates an
important method of determining if the purchase price is
appropriate. Alternatively the seller might have previously
obtained an appraisal which is used as the basis for
determining a purchase price. The problem with a
seller-financed appraisal is that it might not be a truly
independent and fair estimate of current business value.
Another limitation of substantial seller financing is that
it might only be for a very short period of time (perhaps
one to three years). This will necessitate refinancing
within a period that is not always practical to do so. For
example, many commercial lending candidates for refinancing
a business opportunity loan will require a loan history of
24 to 48 months.
Solutions and Strategies for Avoiding Business Opportunity
Investment Loan Mistakes -
Business borrowers should thoroughly discuss options with a
business financing expert before proceeding with investing
and financing programs. These efforts will be worthwhile
since the potential business finance mistakes described
above can be overcome successfully. Business owners should
especially look for advisors and resources which will
provide relevant strategies and solutions for a business
owner to acquire an adequate understanding of complex
business opportunity loan issues.
----------------------------------------------------
Steve Bush is a commercial real estate investment loan
expert - learn how to avoid business finance mistakes and
find out about business opportunity loan strategies at AEX
Commercial Financing Group =>
http://www.real-estate-investment-property.com
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