How to Finance your Investment

Transcription

1 Hw t Finance yur Investment Acquiring a Lan - Key Steps Using the bank's mney t finance the purchase f a business rather than using yur wn capital will give yu significant tax advantages, s speak t yur accuntant abut using brrwed funds and retaining yur wn cash fr ther purpses. An bvius advantage f brrwing is that yu can amrtise r spread the start-up cst ver a perid f time as prfits are generated, rather than paying fr it in ne lump sum up-frnt. Let s lk at the steps invlved in getting a lan t finance yur investment. 1. Select a suitable lending institutin r intermediary wh has a gd business relatinship with Business Lan Lenders. Redmak Finance is the specialist finance brkering service fr hspitality businesses in Queensland. 2. Prepare a Business Plan. 3. Prepare financials/cash flw frecasts /budgets. 4. Prepare an applicatin fr finance detailing: Backgrund Persnal details Previus repayment recrd Security available Lan amunt required Surce f equity funds Viability f business Details f lease terms Adequacy f wrking capital Capacity t repay Marketability f business 5. Check apprval cnditins, lan cnditins, default situatins, penalty fr early payut. 6. Lk at hw the deal is structured t maximize the pprtunity. 7. Be prepared fr and capable f cmpletin f the transactin. It is recmmended that yu take a pragmatic apprach t a deal, and dn t try t push it thrugh if it is tight. The financing f the acquisitin f the business shuld be a cmfrtable prcess, if it stresses yur financial capacity, it will usually either nt be apprved, r if apprved, it will usually lead t a failure in the future.

2 Capital Required t Operate It is easy t neglect the ttal funding requirements in the acquisitin f a business. There is ften much mre than just the business and stck price invlved. Hwever, many businesses which fail in the first three years d s because f a lack f finances. Here is a checklist fr assessing the ttal capital that yu will require t cmplete the transactin. Capital Required T Operate Stck: Stck Other Plant: Majr Items Hand Tls & Miscellaneus Leased Equipment Ryalty, Rent, Fees & Licences: Training Fee Base Franchise Fee Supprt & Advertising Levy Rental/Ryalty Eftps Rental Licences Gdwill/Lease Premium Security Bnd Administratin Expenses: Insurance (incl. Wrkers Cmpensatin) Electricity Depsit Telephne Depsit Stamp Duty Due Diligence Csts/Accuntancy

3 Establishment f Purchasing Entity Legal Csts (inc Security) Operatinal Expenses: Credit Extensin/ Debtrs/Wrking Capital Wages (ne week) Opening Prmtin Unifrms Statinery Sundries/Set Up Csts Ttal Capital Required T Operate: Always cnsider yur TOTAL funding needs, nt just the asking price. Lending Criteria Bank lending fr small business is relatively difficult t btain despite what bankers tell us. It is much easier t btain lan apprval t buy a hme r a car than it is fr a business. Since the Glbal Financial Crisis (GFC), lending institutins have applied mre stringent criteria and requirements upn business brrwers. This des nt lk likely t change in the near future. Mst ptential business buyers have an inflated view f their equity, their brrwing capacity and their ability t service the lan. We need t understand the bank lending criteria with regard t: The amunt f clear equity in the buyer s real prperty. Banks will nw discunt the valuatin and reduce the amunt laned against the discunted security, s the buyer s pinin f their equity in prperty may be much less than they think. Banks will require full financial recrds including tax returns fr several years. Anything less will nt be lked upn favurably. The bank s risk assessment f the subject business will be far reaching, and will include the assessment f the Future Maintainable Earnings (FME). This risk assessment will be based n the fllwing: Sales revenue trends. Is revenue grwing r falling? Revenue vlatility. Hw variable are sales? Grss prfit margin cnsistency. Have GP% changed?

4 Lngevity f the business. Hw lng has the business perated? Hw lng have the current wners perated? Cmpetitrs. Hw des the business cmpare with cmpetitin? Categry Killers. Is the business expsed t a dminant new entrant? Staff. Is there a risk f lsing key staff? Can staff be readily replaced? Special licenses? Are special licenses required t perate the business? Secure supply. Is the business reliant upn prduct supply t maintain prfits? Custmers. Des the business rely upn a handful f key clients? Secure tenure. What length f tenure remains, and hw secure is that tenure? Prir t the GFC, lending criteria were relatively mdest, but nw all financial institutins will nly rely upn fully verifiable data t assess lan applicatins. Tax Return infrmatin is the mst reliable level f financial infrmatin that can be prvided fr any business as it is prvided in a cnsistent frmat and it is legally required t be accurate. With these pints in mind, we need t be able t rughly assess the buyer s ability t acquire a business, and determine if they are being realistic, r nt. Mst Cmmn Business Lans A Line f Credit using the buyer s residential prperty as security. This is prbably the lwest cst surce f funds available. It is the mst likely funding facility used fr lwer priced ventures and the repayments can be managed by yu. At present funding t 90% f the value f the hme can be btained. A Business Mrtgage Lan uses the equity available in either residential r cmmercial prperty as security. These are als lw-cst funds (althugh slightly higher than straight residential) and the term prvided is mre aligned t generally accepted amrtisatin rates fr business lans. An advantage with these is that as the business grws, lenders are ften mre willing t listen t increased funding requests fr well-run businesses even if they exceed the usual lending values against the security. A Business Overdraft prvides funds fr businesses that sell their prducts r services n credit and smetimes have t wait days fr the bills t be paid by the debtrs. The verdraft can be used t pay the business expenses while waiting fr the incme frm debtrs. It can be expensive if nt used crrectly and it is essential that the amunt sught aligns with a well prepared Cash Flw Frecast and is als mnitred regularly. The verdraft is usually required t be secured, particularly fr smaller, less established peratins.

5 Chattel Finance is used t prvide funds t purchase mtr vehicles and items f plant and equipment. This can be either Cmmercial HP r lease. Sme cmpanies will cnsider secnd-hand equipment purchased as part f a business. Business Lans using the business assets as security can be prvided against the value f the business. Lenders generally require that the business has a very strng backgrund such as well-knwn franchise, news agency, pst ffice, management rights and real estate agent's rent rll. Business prprietrs are als required t cntribute their wn funds and share the risk. Larger businesses with gd business plans, perating manuals, strng management and cash-flws may als access these facilities. Debtr Finance is prvided by specialised cmpanies and banks t fund utstanding debtrs using n ther security. Mre ppular verseas than here, it s smewhat chequered histry is nw being verlked fr the benefits it can prvide t a grwing business. Can be used in a start-up situatin. Vendr Finance r Seller Finance is when the seller effectively lends yu a cmpnent r the whle amunt f the mney t cmplete the purchase. Vendr finance is ften used t bridge the gap that may exist in negtiatins and can be structured creatively t suit bth the buyer and the seller. There are ther types f Industry-Specific lans available and yu shuld speak t a qualified prfessinal, such as a Redmak Finance Brker. Remember, the cash-flw f a business is its life-bld and it is essential that a business has adequate funding in place t allw fr grwth and changes in the market. Time spent at the utset t prepare business plans incrprating realistic and sundly based cash-flw and prfit frecasts will pay large dividends dwn the track, as well as allwing yu t fcus n the business.