Can only borrow 50%

[Sambo]

We have seen a business that we like the sound of and have rang the bank to see about borrowing the money. Without actually seeing us and the accounts etc, they have said we can only borrow about 50% of the money although when they see us we may be able to borrow more. Unfortunatly the business has not been running for a while and has no recent accounts (only from before 1995 which I dont understand why they dont have more recent ones because the business was running after 1995...will have to look into this)

Anyway, we need around £225k. We have had our house valued at £80k (will be selling the house) which means we can only borrow another £80k, I think thats what he meant anyway! (wasnt me ringing, was my mum). Anyway, that takes us to £160k...leaving us with £65k that we need to find!

I really want this business but its not fair, we cant afford it

[Cougar]

What sort of business is it? What sector? Is it a limited company, a partnership or soletrade just now? If the business you want to buy has any assets, you might be able to secure some finance against them. This depends what they are and their value.

If your bank is (really) offering 50% then you need to find another £30k because your 80k plus another 30k = 110k which is almost 50% of your 225k.

I am not a financing expert; there are other forum members whose business is financing who may contribute later on.

You should also being looking at the purchase price. Just like buying a house, you need to sure what is included in the price. You need accounts to help work out whether the price is a fair reflection of value in the business. Otherwise how do you know? If a bank is invovled they will want to see the past accounts, as well as your own projections for the future.

Is it a sale of shares, or of assets and goodwill? If the price is for the assets and goodwill and the assets include debts, then unless they are going to sell you the debts, you could let them keep the book debtors and negotiate to reduce the sale price by the same amount. Eg sale price is £225k. Value of debtors on date of sale to you is £25k so - if agreed in advance - these are excluded from sale and you pay a revised purchase price of £200k. If they want to sell the debts to you in the deal, then you are paying cash to them up front for the debts and you get this back when you collect the debts. However, if you can get the seller to agree to keep the debts, then this can be a way to reduce the deal price and make the acquistion more feasible if the funding is very tight.

[Joyous]

Sambo

Don't let your heart rule your head. The fact that the last set of accounts that the business can provide are 10 years old demands that questions are asked. If the business is a Ltd then there must be more recent accounts than that. If there are then why can't/won't they let you see them.

Before selling your house and borrowing large amounts of money you really need to sit down with an accountant and some up to date info on the business so that you can make an informed decision rather than merely liking the sound of it.

I must say you have a very obliging bank if they're willing to entertain lending you over £100k without seeing any paperwork.

Sorry if I sound like I'm lecturing but I think you need to exercise some caution here.

Regards

Joy

[Sambo]

The business ist just a Bed & Breakfast/Guest House with a small post office attatched. The B&B side has been closed for some time due to the owners retiring and buying themselves a smallholding. The post office side is currently run by somebody who was employed by the owners just until it is all sold. Due to it being closed and it needing modernising (stuck in the 80's!) I think is why it is so 'cheap' (it is cheap compared to some we have seen) It is also in a beautiful village! We really do want it and it is perfect for us

[Ian J]

If the B&B has been shut for some time it looks as if you are buying a property and not a business as the business will have to be rebuilt.

Banks traditionally look to match whatever funds the purchaser will put into the venture but I would think that a commercial mortgage might be more useful as that will give you a percentage of the valuation of the property rather than a percentage of whatever funds you have.

Having said that, the finance company will still want to satisfy themselves that you can meet the repayments which will mean business plans and cash flows etc.

There are even special schemes to fund the purchase of Post Offices as they normally come complete with a Post Office Salary.

Commercial mortgages aren't my area of expertise so others will no doubt be able to advise in greater depth

[Sambo]

Has anybody heard of the estate agent Humberstones? That is who is dealing with this property, and they specialise in post office loans, We rang them this afternoon and they said they'd ring us back before 5:30, which they never did, so will ring them tomorrow.

What is a commercial mortgage?

[Ian J]

A commercial mortgage is similar to a domestic mortgage but is on a commercial property instead of a house.

When buying a house you can normally get 95% of the value of the house and repay it over 25 years but with mortgages over commercial properties the amount that you can borrow (called the LTV) is normally less and the period for repayment is also normally less than with a house - typically 10 years.

If Humberstones specialise in Post Office loans have a see what they can come up with and let us know if there is a significant shortfall and we will see what we can do for you instead.

Edit - Humberstones are members of the National Association of Commercial Finance Brokers which is a good sign.

[Sambo]

My mum is on the phone right now with Humberstones. Will let you know what they say!

[Sambo]

Well there goes our plans. The bloke mum spoke to knows all the lenders and says that nobody will lend us enough money for the B&B because the re-payments a year will be more than the salary from the post office (post office salary would be £14k) and the B&B we wouldnt make money on because it would go straight back into the food and electric (washing machine etc)


Back to looking for a retail shop...

[inbakumar]

Sambo,

Do you know the amount of living space area compared to the total floor space? If the living space is more than 40% then the loan has to be treated as a 'residential mortgage' which means you should be able to borrow more than 50%.

If the living space is less than 40% then the loan would be treated as a 'commercial mortgage'. Generally, loan advances in percentage terms are lower against commercial properties than residential properties.

Also do you know how much it would cost you to modernise the B&B? Moreover, even after modernising it, do you think it can be run at a good profit? Do you have the skills and ability to run a B&B?

The reason I would like to know the answers to the above is that there is another way you could get the funding. Assuming it is classed as a 'commercial' mortgage, one can get a short-term bridging finance to resolve the problem along with some hard bargaining.

The scenario would be as follows:

Bricks and mortar valuation = £220000
Purchase price = £200000

Maximum bridging finance available (£220000 * 70%) = £154000
Sale proceeds of your house = £80000
Total funds available = £234000

Costs:
Bridging finance admin/arrangement fees = £3000
Legal, stamp duty, survey fees etc = £3000
6 months' loan interest @ 1.5% pm = £14000
Development costs = £10000
Contingency = £4000
Purchase price = £200000
Total = £234000

My main assumptions are:

(1) For loan purposes it will be treated as a commercial property
(2) The development/modernisation costs will not exceed £10000
(3) The development can be completed within 6 months
(4) The B&B can be re-started and could be made to run at a profit within 6 months.
(5) At the end of the 6 months the bridging loan can be switched to a normal commercial mortgage

As you can see, even though the bridging loan route is much more expensive than a normal commercial mortgage, it can be used effectively to good use in some instances. Also bridging finance companies do not bother too much about your current income or credit status. The loan is granted using the bricks and mortar value of the property rather than purchase price.

If you want me to put you in touch with some good bridging lenders then please let me know.

With best regards,