Business Acquisition Loan
Have you attempted to purchase a business and you had a decent down payment but, could not qualify for financing? Is your seller motivated, and would they allow financing based on business assets? We may have a financing option for you. The business acquisition bridge loan is not based on your credit and your collateral, it is based on the cash flow of the business you are buying. This bridge loan helps you to buy and operate your business today while you build your financial profile to qualify for conventional long term financing.
Business Acquisition Bridge Criteria
These are the main factors the underwriter will review in our Business Acquisition financing.
- Down Payment – You must have at least 20% of the acquisition costs as a down payment. The funds are not sourced or seasoned, but are simply verified prior to closing.
- Experience – You must have at least 5 years in related experience. For example, if you are looking to purchase a restaurant, you should have had 5 years in the management or ownership of a restaurant.
- Seller Second – The seller is willing to carry a note for up to 60% of the purchase price.
- Cash Flow – The Bridge loan is based on the cash flow of the business. In reality it is a revenue advance not a loan. In essence the current owner is acceting as partial payment for their business future earnings ofsaid business.
The Terms of Bridge Loan
The amount of the advance and term of the advance is based on the financial strength of the borrower and the cash flow of the business. Therefore, every business will not get the same amount for a similar purchase price and credit profile. This is a matching loan program, and the purchaser can qualify up to the amount of their down payment assuming the cash flow of the business can support the payment. This is short term financing. The term is usually for three to six months. At the end of that term, if you need to you may qualify for additional financing.Optimally the business will qualify for long term financing.
Who Could Benefit From The Business Acquisition Bridge Loan
This is a niche program for business owners who want to sell and the buyer can not qualify for conventional financing immediately. Therefore, there are many situations and people whom the bridge program will help. They include, but are not limited to:
- Seller Ready to Retire
- Seller Ready to Relocate
- Seller to Family or Friends
- Seller to Business Partner
- Buyers with Down Payment, but not perfect credit.
- Employees who wish to purchase the company.
These are a few situations where the Business Acquisition Bridge Loan Program would be an means to finance the sell a successful business.
When a Commercial Real Estate Investor is looking to purchase income producing property utilizing any number of creative financing methods, one of the most important keys to their success is that their ability to provide adequate, verifiable proof of funds – P.O.F.- to both the seller and the lender. The verification of funds can enhance the investors credibility with the seller as well as satisfy the lenders requirement to know that the borrower has necessary funds to complete their transaction.
Proof of Funds
There are a few ways acceptable to lenders and sellers to show P.O.F. to close your Commercial Real Estate transaction:
- Bank Statements or Bank Verification
- Brokerage Account Statements or Verification
- Escrow Account Verification
“Bank Verification” This is the most acceptable and widely used method to confirm the investors can complete the proposed deal. As such money must be put into a bank account and confirmed by statements or letter from the banker. This is a “hard” (versus soft) method of verification, because money are deposited in an account in the buyers name to serve as proof the buyer can complete the transaction.
“Brokerage Account Verification” Similar to bank accounts, brokerage accounts show acceptable means to complete a purchase transaction. Likewise, statements or letter from the brokerage house representative will meet the requirement to prove adequate financial strength. This is also a “hard” method.
“Escrow Account Verification” This is the one method that can be hard or soft evidence of necessary assets as the escrow agent simply needs to write a letter of confirmation attesting that the borrower has finances available to complete the transaction. It becomes hard when money is transferred into an escrow waiting for the closing.
Finally, there are companies whose sole purpose is to provide evidence of the financial ability of Commercial Real Estate Investors to complete their transactions. Many of them provide “Proof of Funds” and Transactional Financing. P.O.F. is necessary at the beginning of the deal and Transactional Financing is for the day of closing only. Both of these methods are a necessary part of an investors arsenal when utilizing creative financing.
Down Payment Assistance
Let us start off by first dispelling the rumor that down payment assistance (DPA) is something for nothing. For commercial projects the down payment may come from a third party but it is in reality funded by the seller. This means it is a creative way to allow the seller to cover the down payment and sometimes even the closing costs. This will allow a real estate investor to purchase an income producing property for little or no money at closing. To make any deal work you first need a motivated owner who is willing to cover the required DPA and the costs associated with it. THE DPA is Seller Funded!!! The seller Funds (Pays The Down Payment) the Down Payment from their equity!!!
Unlike a residential first time home buyer programs that the DPA will come from a government entity, bank (for CRA purposes) or a non for profit organization; in commercial transactions the seller always funds the assistance. No entity has a financial or other interest to give money to people to purchase multimillion dollar income producing investment property other than the seller.
Seller Funded DPA
Once you have an owner – seller willing to utilize creative financing the assistance in the sell of their property you now have the first requirement for a successful creative transaction. Without a willing seller there are no creative financing deals. As a commercial real estate investor attempting to purchase property using little or none of their own money, your first job is to find that willing and motivated seller. But not only must the they be willing, they must be able. This translates to equity in the investment property. Lots of equity. If you expect to fund a project without using your funds the property should have at least 30% equity. Sure you can do deals with as little as 20% equity, but the options for financing are greatly reduced and the buyer will pay at least the closing costs which would include substantial fees for the DPA. Most loan programs that work with DPA are hard money or stated lenders. These programs require a larger down payment.
Given a willing seller and an income producing property with substantial equity, you now have the minimum requirements for a seller funded assistance program.
How the DP Program Works
- Willing Seller
- Property with Substantial equity
- Contract is written for value of the property (seller will receive agreed upon net amount)
- Third Party DPA Company or private investor sends funds to escrow for closing (from buyer).
- Escrow title company sends DP funds plus fee back to 3rd party company at disbursement of escrow (from seller).
- PropertyValue: $1,000,000
- Loan amount: $750,000
- Seller to net: $700,000
- Down Payment: $250,000 from 3rd party DPA Company
- DPA Fee: $30,000
- Return to DPA Company from escrow: $280,000
- Balance for additional closing costs: $20,000
- Net to Seller: $700,000
This is an ideal situation. There are many variations to this deal based on the terms of your specific transaction. You have an opportunity to purchase property from motivated owners willing to utilize creative financing with seller funded assistance for both the closing costs and /or the required down payment. This is how the seller funded program works.