Making the decision to take out a small business loan is quickly accompanied by the realization that you will soon be asked a long list of pesky questions. “What is your annual revenue?” “What is your credit score?” To prepare, you have a huge stack of papers consisting of bank statements and balance sheets. You walk through the door prepared, expecting to have just as much of a chance for approval as the next business owner – you might want to reconsider.
The truth is, not all loans are the same. Their uses are not always created equal, especially if you are in need of two loan uses; this makes securing funding for them difficult. If your purpose is to find a loan that will allow you to buy an existing business or buy out a partner in your current business, know that you have a pretty big challenge ahead of you.
While this task is not an easy one, it is not impossible. In order to succeed, you need to think like a lender. You must consider the two main issues with taking out a loan to buy an existing business or to buy out a partner from a lender’s perspective.
The Assumptions Tied to Past Data
Lenders will examine past data and make some assumptions concerning your ability to repay the loan in the future. They will ask themselves, “Does this individual make good financial decisions based on their business in the past?” If the answer is yes, this then leads to the assumption that you will also make good decisions in the future. Your annual revenue, credit score, balance sheets and bank statements act as both proof and insurance that you know what you are doing.
While this thought process appears to be valid, this strategy, when used for an individual wanting to buy an existing business or buy out a partner, is less so. Why? How does a lender know if that individual will be good at running that type of business? While an individual might have run a restaurant, how does the lender know he or she will be good at running a car dealership? Different industries have different challenges. To work around this, you must show you have experience in that industry, or prove that there are similarities between your resume and that type of business.
And what about if you are trying to buy out a partner? Lenders have no way of knowing whether it was you that made the business a success or if it was your partner. For many lenders, this is just too big of a risk to take.
Follow the Money Trail
If you are trying to get a business loan, you have probably already put a plan together. This plan should detail the amount of cash you need to start, and how much money you expect to make back – more than enough to pay back your loan, plus the interest. In financial terms, the return on investment (ROI) of your loan will be greater than the cost of your loan, or at the very least equal to it. If you cannot present a detailed business plan to a lender, you can count on that loan to slip through your fingers.
Small Business Loan
Unfortunately, in some cases, it doesn’t matter what you present to a lender. Your business is simply too high risk and nothing you can do or say will convince them to take a chance on you. If this has been a problem you know all too well, there are still options available to you. A high risk provider – like First American Merchant – understand your industries challenges and specialize in providing services to businesses categorized as “high risk”. If traditional lenders have failed to offer their services, consider what a small business loan from FAM can do for you.