Business Loan Brokers Help Fund Businesses
Business loan brokers (or commercial loan brokers) help business owners qualify for and receive commercial loans that suit their unique business financing needs. The business loan brokers are paid a percentage of the loan that the business owner receives. Such commercial loans have a role to play when businesses are in need of financing, but business owners should use caution of incurring high interest rate debt and must remember that the debt must generally be paid off at closing when selling the business.
Commercial Lenders Require Collateral
- The lender of commercial loans may be traditional banks, non-traditional banks, or credit unions.
- The collateral which the lender receives may be based on the owner’s credit and the collateral of the business itself such as its accounts receivables or equipment value.
- For lending that is collateralized on the goodwill of the business, the business-loan applicant must show the lender their financials such as tax returns, bank statements, or profit and loss reports.
Commercial Lenders May Charge High Interest Rates
Traditional lenders (such as banks) charge an average of 3-7% for business loans. Loans backed by the Small Business Administration (SBA) average around 6%. Of course, if interest rates rise in the future and the loan is variable (or tied to the prime rate for example), then such loans become more risky. Non-traditional lenders (such as online lenders or alternative lenders) are easier and faster to obtain, but come with far higher interest rates averaging 13-71%.
Accounts Receivable Lending May Be Advantageous for Business Sales
- Accounts receivable lending – or factoring – is one of the oldest financing mechanisms in the world.
- Essentially, accounts receivable lenders agree to pay the business owner a discounted price (starting as low as 5%) for their accounts receivables (or money owed to the business by various customers).
- The discounted price generally varies with the quality of the receivables such as its age and payment history.
- The receivables come off the business owner’s balance sheet and the business owner receives almost instant cash for the receivables.
- Instead of acquiring debt, the business sells an asset (the accounts receivables) and has higher cash flows as a result of the cash injections from the lender (which is generally treated as taxable revenue).
- This enhances the value of the business when it comes to sell because buyers place a premium on steady cash flow and dislike businesses with chronically high accounts receivables.
Buyers Generally Do Not Assume Debt for Business Sales
In a typical asset purchase deal, buyers form their own corporate entity and purchase the assets of the seller’s corporate entity. The seller is typically left with the debt of its own corporate entity and such debt is not transferred to the buyer.
Parties May Negotiate Assumption of Debt and Business Broker Should Disclose In Asking Price
The parties may of course negotiate the debt in question, but a buyer normally purchases the business ‘debt free’. There are exceptions for vehicle debt and debt associated with large pieces of equipment, which are more commonly transferred to the buyer. The valuation of the business (as communicated to the buyer by a competent business broker) should disclose whether the asking price includes debt that the buyer is being asked to assume. That way there will be no surprises and a buyer can make their offer accordingly.
Sellers Should Prepare to Pay Off Business Debt With Business Sale Proceeds
When determining their proceeds from a business sale, the seller of the business should always calculate what will be left over to them after the sale. Thus if the seller builds up a large amount of business loan debt, eventually such debt will have to be paid off when it comes time to sell the business.
Business Debt A Short Term Solution and Caution Is Advised
While business loan funding may be a short term solution necessary for business owners needing financing, caution should always be used as to the unwarranted accumulation of business debt and the potentially high interest rates associated with non-traditional financing
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business and to discuss how business debt may affect the sale of your business.