Using the Equity in Your Home to Buy a Business

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If you are in the market to buy a business one of the most difficult obstacles to overcome is how to get financing for the acquisition. This article will examine why using the equity in your home is a popular option for many business buyers in Canada.Most small businesses have goodwill as a major asset
Many small businesses list the intangible asset of goodwill as their main asset they offer. Although goodwill is certainly not nothing and has intrinsic value in and of itself, it is not a hard tangible good. For this reason, banks in Canada do not consider goodwill to be a source of collateral that they can use for a loan.Banks are very conservative
The big chartered banks in Canada are traditionally very conservative when it comes to small business loans, especially in change in control situations. They like to have a secured position from a collateral point of view and a solid history of cashflow that will meet their ratio and other lending requirements. For this reason, the banks turn down many loans to business buyers for companies that are otherwise strong and healthy but do not meet their incredibly high lending requirements.Sometimes a cash business is difficult to substantiate
There are many profitable businesses that are ‘cash’ businesses and are difficult to prove profitability for. Businesses such as bars, dollar stores, convenience stores, etc. have traditionally high levels of cash and unclaimed revenues. Although this is practice is clearly wrong and should not be engaged in, it happens in reality. These businesses are very difficult to get loans for.The equity in a home is a popular financing option
Using a home equity line of credit is a very popular route for many business owners looking for funds to purchase a venture. Home equity loans usually have a much lower rate of interest than bank loans for business acquisitions. Home equity lines also are revolving meaning that if you pay down some of it you can have access to the funds again should you need them. Sometimes the minimum payment can be structured as interest-only, giving the new business owner flexibility on the payment schedule.For a person looking to buy a small business, consider using the equity you have built up in your house as a practical financing source. Many times deals for very good small businesses fall apart because buyers do not look to this easy and relatively inexpensive source of credit.