We often see clients wanting to purchase a business or an investment but are restrained because of misunderstandings as to how the banks work with lending money.
As a general rule of thumb the bank has 2 requirements that need to be met to borrow money:
- Equity Test
- Serviceability Test
The Security/ Equity Test
Generally banks require you to have a physical property to secure your lending against. This is in case you are unable to repay the debt the bank has the ability to sell the property and recover the value of the loan.
You need to keep in mind that due to the risk of different properties and ability to sell they have different % of which you can access equity from:
- Personal Home- 80-90%
- Farm land- 65-75%
- Commercial property- 60-70%
For some industries though you are able to use your business as security. This is generally due to the fact the banks see it as a stable industry or business. It is important to talk to the bank as to what requirements they have in relation to your business. Every bank will have different requirements. It is important to be aware of the requirements so that when you are looking at the business you are confident that you will be able to use your business as security.
The Serviceability Test
Generally you need to pass both tests. The second test being that you can make the repayments on the loan.
If you are purchasing a business you will need to have financials for the existing business. The general requirement is 3 years of financial data.
On top of this you will also need to prepare a cashflow forecast. It is important that when preparing the cashflow that you take into account:
- Fluctuations of income and expenses through the year
- Loan interest and repayments
- Assumptions if you are anticipating higher income than previous years
It is important when looking at a business that you finance broker/bank manager and accountant work together to ensure you have the best possible outcome.