Business Loan Request

 
  Business buyers need to borrow money to acquire a business. Adequate collateral, a history of positive cash flow, and a good credit history are criteria used for determining a commercial loan. The Table 1.1 below represents a typical loan request form.

 
 
Table 1.1: Loan request to acquire a business
Amount Requested from lender (40%) $ 40000
Buyer’s Investment (20%) $ 20000
Other Investors (40% SBA) $ 40000
Total $ 100000
Use of funds
Inventory $ 10000
Working Capital (expenses for 1 month) $ 10000
Equipment & Machine $ 10000
Furniture & Fixtures $ 10000
Other $ 10000
Real Estate $ 10000
Total $ 50000
Repayment Terms
Furniture, Fixtures, Equipment, Machinery 10 years
Real Estate 10 years
Collateral (for securing a loan)
Accounts Receivable $ 0
Inventory $ 0
Equipment & Machinery $ 10000
Furniture & Fixtures $ 10000
Real Estate $ 50000
Real Estate Equity in buyer’s home $ 50000
Other including personal assets (savings) $ 10000
Total $ 130000
   
 
 
 
 

Repayment

 
 

The loan is repaid using business income which is ascertained from the Cash Flow statement. Line of Credit (LOCs) last one year and are used for short-term working capital. They must be paid once in a full year and repayments are reported in Cash Flow statements.

Intermediate term loans last from 1 to 10 years and used for buying a business and equipment. Long term loans last 10 years or more and used to but commercial real estate and heavy machinery.

 
     
 

Collateral

 
 

The loan must be paid first by selling business assets and then the personal assets pledged as collateral. Lenders typically ask for appraisal of assets and then discount the value.    

 
     
 

Discounted Collateral

 
 

Every $1 borrowed must be covered by $1 in collateral. Lenders discount the value of assets (collateral) so the discounted value must equal the loan amount.

 
     
 

Example

 Market Value   Discount Percentage   Discount Value 
Inventory $30,000 10 $27,000
Fixed Assets $50,000 10 $45,000
Accounts Receivables $50,000 10 $18,000
Total $100,000   $90,000
 
     
 

Maximum loan based on discounted value:  $90,000

 
     
 

DEBT SERVICE COVERAGE

 
     
 

For every $2 a business has in annual cash flow, the lender will allow $1 (50%) in loan payments. The Company needs to calculate how much they can borrow and afford to re-pay for a seven-year loan:

 
     
 

• $12K net profit + 3K in depreciation = $15K annual cash flow
• $15K x 50% = $7.5K the maximum allowed in annual payments is half of the annual cash flow
• $7.5K/12 months = $625 maximum monthly payment
• $625/$17.13* = $36.48K rounded to $36.5K
*Monthly payment on a $1000, seven-year loan with an interest rate of 11% is $17.13

 
     
 

Maximum loan based on the ability to repay: $36.5K

 
     
 

EQUITY

 
     
 

A business can borrow $3 for every $1 invested. Assume company wants to refinance a $75K loan. The business has assets of $100K, liabilities of $75K, and Net Worth or Equity of $25K. Maximum loan based on equity is $25K in equity x $3 or $75K

 
     
 

Maximum loan based on equity: $75K

 
     

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