Prospective purchasers for small businesses are often of the opinion that bank funding to finance the purchase will be as easy as opening a savings account.

A bank manager once told me that the bank is not keen to own and operate businesses therefore they are not keen put themselves at risk to finance businesses. Banks will rather finance fixed property or motor vehicles which has a resalable second-hand value.  Businesses often own assets which has a very low or even no second-hand value.

To purchase a business which has no goodwill will be of no use. Such a business may tend to pose more of a risk in its lease and other liabilities and has no value other than the second-hand value of it's equipment and assets.  On the other hand, if you pay for goodwill and the business fails after the purchase, every cent that you have paid for goodwill is lost. This is the reason why banks will never finance goodwill. Determine the value of a business ………click here

With a financing application, the bank will only consider the business’ income in the application if the business has financial statements for at least 2 years, management statements for the interim period after the last financial statements and 12 months bank statements to proof cash flow and income. A proper cash flow projection for the business for the next 12 months might also be a condition of the bank. They will usually ask for a signed sale agreement indicating the conditions of the sale. Banks will normally not approve business finance to an amount exceeding 50% of the asset value of a business. 

Should the purchaser not be able to provide all of the above, the bank will only consider his application on grounds of other income and surety.

The typical buyer for a small business will either be a cash buyer, or someone who has access to surplus funds on an existing home loan.

More:  Determine the value of a business ………click here