Many aspire to buy a business but can't quite seem to get started. While there are many low cost opportunities to buy a business or buy a franchise, often the budding entrepreneur doesn't know how small deal financing works.
There are 2 types of business loans - term loans and lines of credit. Term loans are really designed to serve long term capitalization needs and provide large sums of money for long period of time. SBA loans are usually for at least $250,000 for 10 to 25 years and are term loans. The payments make sense when this large amount is spread out over this long period. They stop making sense for the lender when the amount borrowed is too small and not worth the effort to create them. They also stop making sense for the borrower when the term is too short and the high payments cause a problem with their cash flow.
Smaller amounts and/or smaller loan periods are the domain of lines of credit. We need to be looking here to solve the issues we find in smaller deals.
When you start looking for business lines of credit you will find 2 types, secured and unsecured. The interest charged on the line is a function of the risk involved, so secured lines have better rates, often 3 to 6 percent over prime and unsecured lines are more expensive, often 6 to 12 percent over prime. So the next question becomes, does the borrower have some personal security to put against the business Line of Credit or not?
The 2 best ways a business buyer can provide security for an Line of Credit are:
1) A Home Equity Line of Credit (HELOC). If you already have a mortgage, your mortgage company already has your home appraisal and may be able to setup a HELOC at little to no cost.
2) A Securities Line of Credit. This is a relatively new entry in the market. If the the buyer has a securities account that they are willing to transfer to the lender, the lender can use that as the security for a line of credit. The risk here is that if the stock market crashes. Then lender will sell off all your stock at low prices when they call-in the loan. If you have ever purchased stock on margin, it's the same idea.
The advantages to the borrower on both of the above is that they get to keep and enjoy their assets while they are simultaneously used to secure a business line of credit.
Unsecured business lines of credit are next. Everyone in the unsecured Line of Credit market has gone to using credit cards as the primary instrument to manage the account. Issuance is based on your personal credit history. If you go to a large business credit card lender, say Capital ONE (the "what's in your wallet" guys), they will gladly issue you a business credit card but you will find the activity on that card is reported against you personal credit. We work with over 300 lenders who will base the initial issuance of a business credit card against your personal line of credit; but the activity on it is only posted to the business PAYDEX score and not your personal score.
The advantages of this are it allows you to continue to increase your available credit by getting more cards over time and should the business cash flow have problems, it will not effect your personal credit (probably the main reason our clients like this.) This avenue is best for $25k to $50k of quick credit; but makes sense up to $100k. You can only use your personal credit history so quickly before raising a red flag. This means getting $25k to $50K can be done in around 30 days, getting more generally takes longer.
There is a website at http://www.prequalifyhere.com that explains this program in detail. The process is the borrower sets up a credit reporting account (cost will be about $50) and then submits their user-name and password. A credit counselor can then examine their personal history and advise how much credit it may be worth.
With the possible exception of a HELOC from an existing mortgage company, these loans will have an origination fee. The true cost of the loan needs to be determined by also including the terms and the anticipated usage. For example, while the origination cost of an unsecured business line of credit may be higher than a secured line, the lenders generally have introductory offers with their credit cards that can be used to bring down their total cost. What may not be so attractive at the beginning can be the best solution in the end.
There are 2 types of business loans - term loans and lines of credit. Term loans are really designed to serve long term capitalization needs and provide large sums of money for long period of time. SBA loans are usually for at least $250,000 for 10 to 25 years and are term loans. The payments make sense when this large amount is spread out over this long period. They stop making sense for the lender when the amount borrowed is too small and not worth the effort to create them. They also stop making sense for the borrower when the term is too short and the high payments cause a problem with their cash flow.
Smaller amounts and/or smaller loan periods are the domain of lines of credit. We need to be looking here to solve the issues we find in smaller deals.
When you start looking for business lines of credit you will find 2 types, secured and unsecured. The interest charged on the line is a function of the risk involved, so secured lines have better rates, often 3 to 6 percent over prime and unsecured lines are more expensive, often 6 to 12 percent over prime. So the next question becomes, does the borrower have some personal security to put against the business Line of Credit or not?
The 2 best ways a business buyer can provide security for an Line of Credit are:
1) A Home Equity Line of Credit (HELOC). If you already have a mortgage, your mortgage company already has your home appraisal and may be able to setup a HELOC at little to no cost.
2) A Securities Line of Credit. This is a relatively new entry in the market. If the the buyer has a securities account that they are willing to transfer to the lender, the lender can use that as the security for a line of credit. The risk here is that if the stock market crashes. Then lender will sell off all your stock at low prices when they call-in the loan. If you have ever purchased stock on margin, it's the same idea.
The advantages to the borrower on both of the above is that they get to keep and enjoy their assets while they are simultaneously used to secure a business line of credit.
Unsecured business lines of credit are next. Everyone in the unsecured Line of Credit market has gone to using credit cards as the primary instrument to manage the account. Issuance is based on your personal credit history. If you go to a large business credit card lender, say Capital ONE (the "what's in your wallet" guys), they will gladly issue you a business credit card but you will find the activity on that card is reported against you personal credit. We work with over 300 lenders who will base the initial issuance of a business credit card against your personal line of credit; but the activity on it is only posted to the business PAYDEX score and not your personal score.
The advantages of this are it allows you to continue to increase your available credit by getting more cards over time and should the business cash flow have problems, it will not effect your personal credit (probably the main reason our clients like this.) This avenue is best for $25k to $50k of quick credit; but makes sense up to $100k. You can only use your personal credit history so quickly before raising a red flag. This means getting $25k to $50K can be done in around 30 days, getting more generally takes longer.
There is a website at http://www.prequalifyhere.com that explains this program in detail. The process is the borrower sets up a credit reporting account (cost will be about $50) and then submits their user-name and password. A credit counselor can then examine their personal history and advise how much credit it may be worth.
With the possible exception of a HELOC from an existing mortgage company, these loans will have an origination fee. The true cost of the loan needs to be determined by also including the terms and the anticipated usage. For example, while the origination cost of an unsecured business line of credit may be higher than a secured line, the lenders generally have introductory offers with their credit cards that can be used to bring down their total cost. What may not be so attractive at the beginning can be the best solution in the end.
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