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How to Avoid Business Opportunity Investment Loan Mistakes

Stephen Bush

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Although it will not be easy, avoiding key business opportunity investment loan mistakes is likely to eliminate business financing problems that often have disastrous consequences. The use of proper precautions is likely to produce improved commercial loan results.

A key factor that distinguishes this specialized financial strategy from other forms of business financing is the lack of commercial property ownership. Although the transaction will usually involve a long-term lease agreement, the buyer is acquiring an asset that does not include real estate in the purchase price.

The two mistakes described in this article are more typical than expected by most commercial borrowers. While we will not be addressing all possible financing problems in this article, we will include two of the most severe issues to anticipate and avoid.

Length of Financing -

A common mistake when acquiring a business opportunity is to finance the acquisition with a loan that expires within two to five years. One reason for this occurring is the failure to negotiate a longer-term lease, since it is typical for lending terms to expire with the lease.

A viable solution is to insist on a lease that is at least ten years long. This will facilitate business finance terms that can typically be for a ten-year period. One key factor that limits this kind of financing to a ten-year period is due to the absence of commercial real estate collateral.

Use of Excessive Seller Financing -

Although nominal seller financing (such as 10-20%) can be helpful, attempts to finance either entirely or primarily with seller financing are generally inadvisable. There are several different issues which can result in this being a serious mistake.

If a seller is providing most or all of the business acquisition financing, a formal appraisal might not be obtained. While this appears to offer the advantage of saving the cost of such an appraisal, it also eliminates an important method of determining if the purchase price is appropriate. It is also not uncommon for a seller to have acquired an appraisal that is used to substantiate the purchase price for the asset they are selling. An appraisal financed by the seller is not likely to be an independent value estimate.

Another limitation of substantial seller financing is that it might only be for a very short period of time (perhaps one to three years). This will necessitate refinancing within a period that is not always practical to do so. For example, many commercial lending candidates for refinancing will require a loan history of 24 to 48 months.

Solutions and Strategies for Avoiding Mistakes -

Business borrowers should thoroughly discuss options with a business loan expert before proceeding with investing and financing programs. These efforts will be worthwhile since the potential mistakes described above can be overcome successfully. Borrowers should seek out advisors capable of providing candid solutions in their efforts to obtain a better picture of complicated financing possibilities.

Stephen Bush is a commercial mortgage business loan expert - learn about avoiding working capital mistakes and find out about business financing solutions at AEX Commercial Financing Group =>


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