Lenders, like business owners, have one ultimate goal: to make money. Agreeing to finance a business purchase presents risk. In order to manage that risk, third-party lenders need to verify that you have – or will have – the cash flow to pay back your loan. Here are some of the most common pleas used by buyers to attain funding – and why they mean absolutely nothing to lenders.
1. Unreported Income
Failing to report income may be illegal, but it’s not uncommon. Back in 2006, the IRS estimated the tax gap in unreported funds to be as high as $100 billion. Not only does hiding income from Uncle Sam jeopardize the success of a company, but it also impedes financing. If the seller of a business has a large amount of unreported income, lenders know that future profits may end up going back to the government before they can be used to pay off a business loan.
2. Unrelated Experience
If you’re buying an ambulance business, it may help third-party investors to see that you have some experience in the medical transport industry. What they don’t care about, however, is your experience driving a non-medical vehicle or working as a sales clerk at the mall during college. If your experience is unrelated, it’s not worth mentioning when seeking traditional or small business administration financing.
3. Past Performance
Perhaps the business you are interested in purchasing performed extremely well four years ago. As they say, that was then, this is now. Whether it was a change in the market or the owner’s poor business decisions, lenders aren’t interested in speculating about why a company has experienced varied past success. Rather, they want to know the businesses they are funding are going to perform well today.
4. Regulatory Changes
Before you tell lenders that Medicare reimbursement changes have kept your targeted acquisition from performing at a higher level, consider saving your breath. The medical transport business is a highly regulated industry. Buying ambulance companies for sale requires balancing the cost of these regulations with the rewards of doing business in the growing and potentially lucrative health care market. That’s just the name of the game. It’s up to you – not a lender – to manage that regulatory risk.
5. Plans to Improve Business
You may be certain that your new marketing campaign will do wonders for your bottom line, but good luck convincing lenders. Those with business experience know that even the best-laid plans sometimes fail. Assuming the profitability of a company could hinge on one great marketing idea isn’t just a bad investment strategy; it’s a bad business strategy.
6. Buyer’s Prior Profits
Maybe you used to make good money when the economy was thriving, but now your profits – and your ability to make a down payment – have all but dried up. It makes a nice sob story, but it’s not enough to convince a lender. If you can’t make the minimum down payment, perhaps you should consider an alternative such as seller financing.