Podcast: Play in new window
Today I want to talk to you about a question I was recently asked by Troy in New South Wales.
He asked…
“I’m an eighteen year old, and can I get a loan from the banks for a million dollars to buy a business?”
The Short Answer
Yes, but without knowing your specific situation my guess is it will be challenging.
The Longer Answer
I recently had a financial expert, Kevin Lee, come in and speak to my class at Buying a Business Master Class because he’s written over a billion dollars worth of loans and he deals with the banks every single day. And this is what he shared with the class.
There are 4 Questions You Need To Answer To Get A Bank To Loan You Money
- 1. Can You Service The Loan? [1:04]
- 2. What’s Your Risk? [1:32]
- 3. Who Are You? [2:14]
- 4. What Can They Take? [2:46]
1. Can You Service The Loan [1:04]
Do you have a job that’s paying you an income that will continue to be received once you buy the business?
Do you have investments that are bringing you an income? What cash flow, profits and take home income can you pull out of the business you’re gonna buy, and combining all of that, can you service the loan repayments?
If you borrow a million dollars over 5 years, you need to be able to pay the monthly repayments somehow. Because you are buying a business this is a good start, unlike starting a business you will most likely have cashflow from day 1 in the new business, but is it enough to pay the expenses and the loan as well or will you need to fund the repayments from some other type of income?
2. What’s Your Risk? [1:32]
A bank is not going to give you a million dollars to buy a business for a million dollars. Why you might ask?
Because you haven’t put any skin in the game, the banks want you to show how serious you are about buying this business and they want you to do that by putting your own money into it.
Think about it from the banks point of view – if you don’t put any of your own cash in, what’s to stop you from buying a business, they put all this money up, and then you decide that actually you don’t want to do this business thing anymore and walk away from the business. The bank’s now stuck with a business that they’ve got to try and get rid of.
So they want to know what skin are you putting in the game to show your commitment.
3. Who Are You? [2:14]
The next thing a bank is going to look at when you want to borrow money to buy a business is what is your character like.
What is your history? What is your credit rating? Have you been late in paying credit card payments? Have you defaulted on loans in the past? Have you declared bankruptcy recently? Have you successfully run a business before? What preparation have you done to ask for the money to be lent to you?
If you’re going to go ask a bank for a million dollars, you’re going to have to do a very thorough business plan to show your character and show your ability to research and understand the industry you’re about to buy into.
Banks aren’t just lending on the business, they are lending on you as the entrepreneur.
4. What Can They Take? [2:46]
When borrowing money from a bank to buy a business the banks want to know what can they take if you don’t pay your loan.
What are they going to be able to do to get their money back?
Now thinking about if they take your business off you but the business doesn’t have a lot of assets, thats going to be worrying for them as they’ll wonder how easily can they sell that business again and make their money back.
When there is a lot of stock and assets in a business, they can possibly liquidate and quickly make all or at least some of their money back.
Remember To Be Creative [3:12]
Now the thing is that I teach my students here at Business Builders Academy that as entrepreneurs we are creative. And as such, I teach creative strategies to financing buying a business.
At my How to Buy a Business for a Dollar intensive, I actually share five different ways that you can creatively buy a business without requiring the money from the banks, either at all or in a lot less. So be aware that as entrepreneurs, you are creative, think creatively, think how could you buy this business without involving the banks.
Carl is the Author of Red Means Go! and founder of Business Builders Academy. He invests in and runs a number of businesses, and regularly teaches business skills through online training and live speaking events.
