Obtaining a Business Loan to buy an existing Biz

marc_ob

Hi everyone.

I require some advise from someone who has been through this before, who has perhaps worked in banks and knows criteria for loans etc.

A friend is selling his catering business, and I want to buy and start running it myself.

I have all the expertise needed to run and expand it, and I know it will be a success. It's just convincing a bank that.

Heres some info:

I have bad credit from my university days (I'm 24 now) and so this will hinder any attempt at getting a business loan.

The loan will be for £25,000 - £22,000 of it for the business and £3000 for initial cash flow.

Me and my brother (who is 20 and has good credit) want to split the loan 50/50.

The exisiting business includes £20,000 worth of assets - thus reducing risk for the bank.

Turnover last year was £60,000 approx, and after my plans for expansion are implemented this will increase hugely (although exact figure will have to be worked out upon reciept of financial info from accountant).

If the bank manager sees that the business is sound, and could easily be expanded will they be eager to lend despite my bad credit.


So here is the key question:
I can be sure that the business is sound, and that the bank has minimal risk - but given my bad credit - will they be convinced?


Thank you so much if you reply, it will be a great help!

:j

paulwf

First things first. Catering works nearly always on cash on delivery for stock - certainly if you are new, and its getting almost standard since the recession - so you're going to need more than £3K for cashflow if you want to turn over £60K. Any staff you employ will probably want paying weekly or if casual staff then on the night.

Next thing - the bank won't be interested in £20K of catering equipment. Once its second hand they won't want to touch it. That also values the business goodwill at £2K which seems rather odd?

£60K turnover also is unlikely to leave enough money for 2 people to draw a wage, what is the actual profit from the business?

Now to cut to the chase. Forgetting any credit ratings the bank will want to see you put in around 1/3 of the total cost yourself i.e. £7K+ in your case. This shows you are serious and have a vested interest in the business and you aren't just going to walk away. Next whatever they lend you will require security i.e. a house unless you go down the Enterprise Finance Guarantee.

Unless you are going to put some money in yourself unfortunately I don't think a bank will even talk to you. Perhaps you could grow the business starting from scratch rather than buying one though?

marc_ob

paulwf wrote: »

First things first. Catering works nearly always on cash on delivery for stock - certainly if you are new, and its getting almost standard since the recession - so you're going to need more than £3K for cashflow if you want to turn over £60K. Any staff you employ will probably want paying weekly or if casual staff then on the night.

Next thing - the bank won't be interested in £20K of catering equipment. Once its second hand they won't want to touch it. That also values the business goodwill at £2K which seems rather odd?

£60K turnover also is unlikely to leave enough money for 2 people to draw a wage, what is the actual profit from the business?

Now to cut to the chase. Forgetting any credit ratings the bank will want to see you put in around 1/3 of the total cost yourself i.e. £7K+ in your case. This shows you are serious and have a vested interest in the business and you aren't just going to walk away. Next whatever they lend you will require security i.e. a house unless you go down the Enterprise Finance Guarantee.

Unless you are going to put some money in yourself unfortunately I don't think a bank will even talk to you. Perhaps you could grow the business starting from scratch rather than buying one though?

Thanks for the reply mate.

The cash flow is not an issue, I've run the business for the previous owner for the last year and we wouldn't need over 3k for cash flow.

Turnover for this year will be above the 100k mark not including the market stalls (which is a new area we've started), so drawing a wage isn't an issue either, as the profit margins are just above 50% of the turnover.

Also, what do you mean by £2k goodwill - I'm not up on my business lingo!

Also!, could you elaborate in the Enterprise Finance Guarantee? What is this route? Unfortunately I have no personal savings or assets to contribute.

See my pickle??

bengalknights

marc_ob wrote: »

Thanks for the reply mate.

The cash flow is not an issue, I've run the business for the previous owner for the last year and we wouldn't need over 3k for cash flow.

Turnover for this year will be above the 100k mark not including the market stalls (which is a new area we've started), so drawing a wage isn't an issue either, as the profit margins are just above 50% of the turnover.

Also, what do you mean by £2k goodwill - I'm not up on my business lingo!

Also!, could you elaborate in the Enterprise Finance Guarantee? What is this route? Unfortunately I have no personal savings or assets to contribute.

See my pickle??

So your profit would most likely decrease then unless your planning on increasing prices as you would have to register for VAT on turnover above 70K the only upside would be you can reclaim vat

Goodwill in simple terms is the amount you are paying for the reputation of the company as your paying more than what the assets are worth.

Enterprise Finance Guarantee is when the government facilitates the lending http://www.bis.gov.uk/policies/enterprise-and-business-support/access-to-finance/enterprise-finance-guarantee give an explanation.

paulwf

How do you intend to generate £100K of turnover with only £3K of stock? Plus you're going to need extra for unexpected bills, cancellations, rainy days, emergency maintenance works etc.

When you say profit margin do you mean gross profit margin or net profit? There's a huge difference and you need to understand exactly what is what. BTW a 50% gross profit margin is quite low in catering.

By goodwill I mean the bit of the business that you are buying that isn't the assets...i.e. the actual business itself. If its on the market for £22K but includes £20K of assets then its actually being sold for £2K...seems unlikely for a business with a £100K turnover.

If you have no personal savings or assets to contribute then I doubt a bank will speak to you. I'll wait to see if others differ in their opinion but the banks I approached made it clear to me...put some money on the table or we won't even consider lending to you.

Russe11

Do you watch the news, read newspapers or keep up with current affairs... lending to businesses is very very low, even large established busisness's are struggling to obtain credit.

What make this business you are buying so special? what parts of it can't you start up yourself? Sounds like someone trying to off load 20k worth of equipment with out losing much.

If you have personal funds already, I'd be more inclined to try princes trust grants and funding.

marc_ob

paulwf wrote: »

How do you intend to generate £100K of turnover with only £3K of stock? Plus you're going to need extra for unexpected bills, cancellations, rainy days, emergency maintenance works etc.

When you say profit margin do you mean gross profit margin or net profit? There's a huge difference and you need to understand exactly what is what. BTW a 50% gross profit margin is quite low in catering.

By goodwill I mean the bit of the business that you are buying that isn't the assets...i.e. the actual business itself. If its on the market for £22K but includes £20K of assets then its actually being sold for £2K...seems unlikely for a business with a £100K turnover.

If you have no personal savings or assets to contribute then I doubt a bank will speak to you. I'll wait to see if others differ in their opinion but the banks I approached made it clear to me...put some money on the table or we won't even consider lending to you.

I've run the business for a year, so my issue is not the understanding of how it works or what I need to run it. It's a complicated situation that has arisen which means I'm being offered the business at far below what it is worth.

My issue is with the likelihood of getting finance. I feared that would be the case - that I would need to offer security.

I will check out the government scheme to see if it is good or not.

Thanks chaps - any other views would be appreciated too.

steve1980

If you haven't got a penny then don't waste the banks time. They are not going to give you a business loan for 100%.

In any case you need to know what the net profit is, not the turnover. 100k turnover would also mean that the company is VAT registered so you need to take that into consideration.

marc_ob

OK, so I've managed to secure 1/3 of the funding.

Would the bank consider my application for a business loan if I have bad credit?

The business is very strong, and I have the ability to convey this in my business plan and it will show in the financial projections.



My credit is bad insofar as I've been defaulted 3 times in the past for student overdrafts (oh the regret!) and the payment arrangements on the remaining balances are still being paid at present.


Thanks again peeps!

chalkie99

Someone will be along with a reply to your latest post, I am sure. However, in the meantime, I just want to pick up on something you said originally in that you want to split the loan 50/50 with your brother.

Be aware that things don't work like this and both you and your brother would be jointly and severally liable for the whole amount.

Now, I am sure you will say "Ah, but he's my brother!" but a trawl through the pages of these forums (look at the sticky "Lending to friends and family" in the Loans section) will show how circumstances change and family fall out. If things got a bit rocky and your brother disappeared you would be liable for his share of the loan as well.

Still doesn't sound like as great a deal as you seem to think it is quite honestly but listen to what others say.

Premier_2

marc_ob wrote: »

...I have bad credit from my university days (I'm 24 now) and so this will hinder any attempt at getting a business loan.

The loan will be for £25,000 - £22,000 of it for the business and £3000 for initial cash flow.

Me and my brother (who is 20 and has good credit) want to split the loan 50/50.

The exisiting business includes £20,000 worth of assets - thus reducing risk for the bank.

Turnover last year was £60,000 approx, and after my plans for expansion are implemented this will increase hugely ...

No one cares about t/o (apart from an egotistical owner).
Turnover won't repay the debt.

Why can't your brother borrow the amount required, and you repay him? If you're splitting things 50/50 then why won't he lend you the £12k necessary? Actually as you have now secured 1/3 of the funding, he only needs to lend you £8k

If your own brother won't lend you £8k, especially as arrangements could be made so that he owns the £20k assets you say exist until you've paid the loan off in full, then I doubt anyone else will be too keen.