Warning: Not All Prospective Buyers Know How To Apply For Commercial Loans.
Help yourself by helping them. Help them understand how to qualify for commercial loans. To help them, you need to understand the qualification requirements for a loan to finance buying your business. Be ahead of the curve to prevent a prospective sale from falling apart in the eleventh hour because the buyer and your business combined can't qualify. Being forewarned may save you a lot of time.
Knowing the lending requirements may also help you steer prospective buyers to other financing alternatives. You don't want anyone interested to become discouraged because of a financing option that won't work for them.
Many people understand the power of leverage. Some just enough to be dangerous. For the sake of clarity, as used here, leverage is the control of a valuable asset, with little of your own cash at risk. It is using other peoples' money. This in turn has given rise to commercial loans being very popular with business buyers.
Lenders understand the power of leverage. And when they forget it, as they sometimes do, they usually get a quick and expensive education. After relearning the lessons about leverage, even the most aggressive commercial lenders want to reduce their risk. That means that qualifying for commercial loans will require a better underlying business, and/or much more cash at risk by the buyer.
They are subject to different underwriting guidelines from different lenders. However, in general they all relate the loan amount to the ability of the underlying business to meet its obligations to the lender. Obligations include making the required interest and principal payments. They all demand a cushion between interest and principal owed, and the ability of the business to generate the needed cash.
What about a prospective buyer seeking a loan to finance 80% of the purchase price because he can only put up 20%? And if the business can only generate sufficient cash to service a loan amount of 60% of the purchase price with a cushion? He will be out of luck. You will need to help him develop and evaluate other financing options.
Lenders make commercial loans to earn interest, and to have the loan repaid on schedule. They can then start the process all over again. They are not interested in having to seize a business for non payment. They are in the lending business, and usually have no expertise in running your type of business. They don't want to learn either. They prefer to make performing loans.
There are regulatory reasons that most lenders want loans to perform. Non performing loans effectively reduce the amount of cash they have available to make other commercial loans. In some circumstances a non performing loan can have a detrimental cascading effect on the lenders business activities. Admittedly one non performing loan is unlikely to do them too much harm. However they try to make loans that will perform as a general practice.
The market for these loans varies with the state of the overall economy, as well as the local economy. Lenders are generally sensitive to these two items, but others will influence their appetites as well. They wish to avoid being overstocked with loans in any particular sector of the economy. And their appetite for borrowers in any particular industrial sector will also vary with the performance and prospects for that sector.
I used the term market earlier. The commercial loan market is just that. And like any market it responds to the forces of supply and demand. Just like any other market, when demand and supply get out of balance, loans get either more or less costly. And cost can be reflected by interest rate, other fees, relationship between loan and underlying value, etc.
This is intended to show you why you should want to know more about commercial loans. And how their availability and price can impact the sale of your own business. The old saying, knowledge is power, is no less true in this situation.
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