Preparation for a Loan to Buy a Business

At this point, you are either still looking for a profitable company to buy or have settled already in acquiring a certain company. Whatever you status is, the next essential thing you need at this point is money – funds to purchase the business you are eyeing. This is where business loans come in.

Since President Barack Obama signed into law the Small Business Jobs and Credit Act last month, reports state that loans backed by the Small Business Administration (SBA) increased by 30 percent for this year. When SBA ended its fiscal year, it had approved $16.84 billion, or 54,826 small business loans. This was within the past 12 months. The increase is attributed to the measures enacted by last year’s stimulus, which eliminated fees and increased the government’s maximum guarantee to 90%, up from 75%-85%.

The other side of the coin however, is that many businesses that filed for a loan were denied. Why so? Based on the study conducted by the Federal Reserve Bank of New York during June and July of 426 small-business owners, it found 59% of small businesses wanted credit, and half of those were denied. In addition to the small businesses that got nothing of what they sought, about 75% of those surveyed said they received “some†or “none†of the credit they wanted.

In an interview, Kausar Hamdani, Senior Vice President and Community Affairs Officer said, “Until now, we’ve only heard anecdotally about difficulties for regional small businesses in obtaining credit without any numbers to confirm this.†Meanwhile, Bernard Clineburg, Chief Executive of Cardinal Bank, said in her interview with MarketWatch, “As a bank that wants to make small business loans, we can’t find the borrowers…qualified borrowers are hard to find.â€

Then what can you do to make your company more qualified? Here’s what we found out.

Be well-organized financially. As they say, talk is cheap. Lenders prefer to see things in black and white. It’s best to present to your lender your annual and interim financial statement, tax returns from the past three years and of course, your business plan, stating where your company has been and where it is headed. Of course, you should state that you intend to buy a business.

Be ready to tell your story. If your company survived the financial downturn, then you are worthy of a loan. What could set you apart is how you managed to survive and how you paired up compared to your competitors.

Transparency. It’s a cliché, but ‘honesty is the best policy.’ If you had unappealing credit history, your company shouldn’t hide it, instead bring it up front and explain the situation. After all, banks will find out about it once they check on your lending records.

Be realistic. Like any other loans, companies should be prepared to put up collateral for their loan. Percentage may vary but 15 to 30 percent is ideal.