For James to be his own boss, he had to choose between creating a start-up or buying a small business for sale.
It would be very satisfying, he thought, to be the originator of a going concern. And that way he'd avoid having to pay someone else for "goodwill," a necessary cost when purchasing a company. But the strong argument for an acquisition involves its ready customers, suppliers and employees. And the fact that cash flow starts from day one.
Then it came time to borrow some money to make his dream come true, and the answer was obvious.
"It may be difficult to raise money to help you buy a business," a loan broker told him. "But it's next to impossible to get funds for a brand new business."
After talking to lenders and giving the matter some thought, James realized the importance of "borrowability" and why it is highest for a small business for sale.
Here are key reasons why lenders are more inclined to loan money for a business for sale, contrasted with a start-up.
1. The plan for creating a new business might provide interesting reading for a prospective lender. It may paint a very optimistic picture, but without an actual history to prove the claims made, it's just an idea.
By comparison, the business plan that accompanies a loan application for a purchase will include balance sheets, profit and loss statements and related documents--all information based on the track record of an actual business. That's the kind of information that gets positive attention from lenders.
2. The record of earnings not only demonstrates that the company has a solid past, it also is the basis for making believable predictions about its performance in the future. There is no basis for making projections about an enterprise that does not yet exist. To a lender, it looks like an invitation to take a big risk. But that same lender will be reassured about the reliability of the applicant's plans and expectations, if they are presented as a continuation of documented past performance.
3. Here's what the prospective borrower wants the lender to see: "Seller will carry back part of the purchase price."
The willingness of a seller, who knows the business better than anybody, to act as a lender for the new owner, is a strong vote of confidence that the business, and the buyer, will be successful. And will be able to pay the debt.
There's no way, in a request for start-up funding, to be that convincing.
It should be noted, of course, that the buyer's business experience is a critical factor for consideration by the proposed lender. Strong net worth and clean credit history also are vital. But just as important, if not more so, are the arguments for and against the likelihood that the loan will be repaid on time.
When it's necessary to get a loan in order to become a business owner, the approach most likely to succeed is to buy a business already in existence.
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