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Business Loan Request
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Business buyers need to borrow money to acquire a business. Adequate collateral, a history of positive cash flow, and a good credit history are criteria used for determining a commercial loan.
The Table 1.1 below represents a typical loan request form.
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Table 1.1: Loan request to acquire a business |
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Amount Requested from lender (40%) |
$ 40000 |
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Buyer’s Investment (20%) |
$ 20000 |
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Other Investors (40% SBA) |
$ 40000 |
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Total |
$ 100000 |
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Use of funds |
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Inventory |
$ 10000 |
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Working Capital (expenses for 1 month) |
$ 10000 |
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Equipment & Machine |
$ 10000 |
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Furniture & Fixtures |
$ 10000 |
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Other |
$ 10000 |
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Real Estate |
$ 10000 |
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Total |
$ 50000 |
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Repayment Terms |
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Furniture, Fixtures, Equipment, Machinery |
10 years |
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Real Estate |
10 years |
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Collateral (for securing a loan) |
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Accounts Receivable |
$ 0 |
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Inventory |
$ 0 |
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Equipment & Machinery |
$ 10000 |
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Furniture & Fixtures |
$ 10000 |
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Real Estate |
$ 50000 |
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Real Estate Equity in buyer’s home |
$ 50000 |
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Other including personal assets (savings) |
$ 10000 |
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Total |
$ 130000 |
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Repayment
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The loan is repaid using business income which is ascertained from the Cash Flow
statement. Line of Credit (LOCs) last one year and are used for short-term
working capital. They must be paid once in a full year and repayments are
reported in Cash Flow statements.
Intermediate term loans last from 1 to 10 years and used for buying a business
and equipment. Long term loans last 10 years or more and used to but commercial
real estate and heavy machinery.
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Collateral
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The loan must be paid first by selling business assets and then the personal
assets pledged as collateral. Lenders typically ask for appraisal of assets and
then discount the value.
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Discounted Collateral
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Every $1 borrowed must be covered by $1 in collateral. Lenders discount the
value of assets (collateral) so the discounted value must equal the loan amount.
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Example
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Market Value |
Discount Percentage |
Discount Value |
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Inventory |
$30,000 |
10 |
$27,000 |
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Fixed Assets |
$50,000 |
10 |
$45,000 |
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Accounts Receivables |
$50,000 |
10 |
$18,000 |
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Total |
$100,000 |
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$90,000 |
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Maximum loan based on discounted value:
$90,000
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DEBT SERVICE COVERAGE
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For every $2 a business has in annual cash flow, the lender will allow $1 (50%)
in loan payments. The Company needs to calculate how much they can borrow and
afford to re-pay for a seven-year loan:
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• $12K net profit + 3K in depreciation = $15K annual cash flow
• $15K x 50% = $7.5K the maximum allowed in annual payments is half of the
annual cash flow
• $7.5K/12 months = $625 maximum monthly payment
• $625/$17.13* = $36.48K rounded to $36.5K
*Monthly payment on a $1000, seven-year loan with an interest rate of 11% is
$17.13
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Maximum loan based on the ability to repay: $36.5K
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EQUITY
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A business can borrow $3 for every $1 invested. Assume company wants to
refinance a $75K loan. The business has assets of $100K, liabilities of $75K,
and Net Worth or Equity of $25K. Maximum loan based on equity is $25K in equity
x $3 or $75K
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Maximum loan based on equity: $75K
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