Home – New Forums Starting your journey Cash or bank loan to buy business

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  • #999129
    brownbag
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    My wife and I are planning to buy a small business. It’s not expensive to buy and there are very few startup costs. We have the cash to buy the business up front and pay all those costs. It will be less than $50000.

    The question I have is, is it better in general to buy the business with a bank loan, or to use cash. From my point of view, I see the following pros/cons of the bank loan:
    PRO – I will have more spare cash available for future investments, such as investment properties, etc
    PRO – interest is tax-deductible and
    CON – admin fees to get loan are significant on a small loan
    CON – Gross cost is higher – I’ll pay a higher interest rate on the money with a loan than what I get from the bank with my money.

    I could put together a spreadsheet to compare this in our circumstance, but are there other factors I should consider?
    Cheers all.

    #1217938
    LucasArthur
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    Hi BrownBag

    So many more variables are associated with this situation.. like, are you even eligible for a loan and would the business and financial standing of the individuals and the business itself (if existing) support an application etc.

    Also, to add a different angle, there is nothing stopping you from loaning yourself the money and having interest paid (documented legally though) paid back to yourself….

    The true answers though will lie wholeheartedly in your own comfort levels, financial standing and backing and so forth…

    Banks and finance are hard to obtain and sometimes inhibit progression with some purchases..

    All the best

    Jason Ramage | Lucas Arthur Pty Ltd | E: [email protected]   P: 61 3 8324 0344    M: 61 412 244 888
    #1217939
    RunicConvenience
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    issues with purchasing the business on loan are that most lenders will want 6months of financial records to base your “value on” the average business for sale does not give that many trustable documents.

    So they would be using the assets your purchasing for the business this could be very little if that 50K is mostly stock as it could be expired, or slow to move. Also never buy a business on the sale price. You want someone to do the valuation for you independently and to make sure everything your getting is above board. That being said have you considered the cost of repaying that loan on top of the cost of running and improving the business and the possibility that numbers quoted don’t match when the owner leaves the business to you.

    can you afford to add expenses to the monthly running of this business purchase?

    TL;DR any long-term benefits of using a loan for tax purposes will be lost if the monthly expenses remove any sense of cash flow and any business without cashflow is sure to fail before you can repay anything.

    #1217940
    brownbag
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    Thanks Jason. I can’t imagine that we wouldn’t get a loan with our house paid off. The business is very profitable and well known (in our city) already so that will also be very simple.
    I like your idea of lending yourself the money. I’ll look into that one a bit more.

    #1217941
    LucasArthur
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    brownbag, post: 262846, member: 112769 wrote:
    Thanks Jason. I can’t imagine that we wouldn’t get a loan with our house paid off. The business is very profitable and well known (in our city) already so that will also be very simple.
    I like your idea of lending yourself the money. I’ll look into that one a bit more.

    No drama, although the credentials of owning a home and the strong cash flow or success of the business appears solid from your comment – these are not the only 2 factors banks consider, sadly.

    There is a vast array of things they use to lend against or justify lending applications for business/commercial usage, such as:
    – what was the last PAYG of the intended applicant/s
    – what is the savings like (owning a home doesnt always equate to an ability to save – eg could be low value property – or you inherited it – or used inheritance to pay off etc etc) –
    – applicants experience in the intended industry of purchase
    – age of applicants
    – business plan and intended projections
    – competition
    – bad defaults or late payments of anything
    – and the list goes on.

    Not trying to evoke fear, just being forthright in advice (and i am not an accountant or legal practitioner so please read into as you wish or experience) when it comes to commercial lending…. If you are prepared, objections can be overcome, if you are sideswiped by the process it can take longer to overcome ;)

    Cheers

    Jason Ramage | Lucas Arthur Pty Ltd | E: [email protected]   P: 61 3 8324 0344    M: 61 412 244 888
    #1217942
    brownbag
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    Thanks for the warning. But don’t worry about evoking fear. If the banks won’t give us a loan they will have just made the decision for us. :D

    #1217943
    bb1
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    brownbag, post: 262848, member: 112769 wrote:
    Thanks for the warning. But don’t worry about evoking fear. If the banks won’t give us a loan they will have just made the decision for us. :D

    You have had some great advise from harry, and knowing his background is banking its good solid advise.

    But, my suggestion is even if the bank is prepared to shower you with cash, or if they are not prepared to cough up. Talk to an accountant, they are the one’s who can give you tax advise on the best approach, sure cash is an option, but is it the best way in the eyes of the tax man.

    #1217944
    bb1
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    brownbag, post: 262846, member: 112769 wrote:
    The business is very profitable and well known (in our city) already so that will also be very simple.

    Is it very profitable, really, who told you, is it just based on scuttlebutt around town, is it based on dodgy figures put forward by the business themselves,

    Not saying it isn’t, but many ”very profitable” business’s have not really being when the new owner or the bank gets hold of them.

    How do you know it’s profitable??

    #1217945
    Paul – FS Concierge
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    Hi And Welcome to Flying Solo [USER=112769]@brownbag[/USER] . It is great to have you!

    Thank you for joining our community and posting today.

    The other very important factor to consider is having sufficient available funds to pay workers, suppliers and others ie, the purchase price + capital to fund cash flow as [USER=112020]@RunicConvenience[/USER] has alluded to..

    Cheers

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