Q: I am purchasing a business with a successful 10 year track record. Purchase price is $2.8M with seller financing of $1.175. I have found a bank who will loan $975K but they want my house as collateral. The business has assets (no real estate) of approx $1.5M (600K inventory + 900K FF&E). While I intend to go forward, I was wondering about the potential benefits of refinancing with someone who would not require my house as security? When could you do this and with whom (SBA)?
A: Unfortunately, when it comes to bank financing, they want bulletproof collateral and not the business' assets. Under normal circumstances I would strongly urge you to avoid pledging your house but this case is a bit different. If I understand the deal correctly, you'll be completing a $2,800,000 acquisition for just 23% of your cash down at closing (the $650k difference between the seller financing and the bank). This is a very attractive deal. While it would be ideal to negotiate this transaction without any personal assets on the line, relative to the purchase price your collateral is not significant. But, the question remains whether there is another way. Some of the "hard money" lenders (those who charge a higher rate) may be willing to do this type of deal. Also, you may want to consider structuring the deal so that they provide you with a line of credit against the inventory portion which is collateralized by the inventory itself and use these funds towards the purchase price.
Also, you may want to contact some lenders and financial groups such as GE Capital who may be willing to buy the FF&E from you and lease it back. Here again you can use the proceeds to fund the purchase. In order to do this in a timely manner, you may need to get the traditional loan, secure it with your home, and have an option for early payment with no penalty and then explore the other options available to you.
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.
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