I want to take a one million dollar loan to purchase a one million dollar business. Can i use the business itself as a collateral?
You have to prove it is worth a million dollars. The lender needs to figure out how they would get the business in default of the loan. It is far easier to get a loan to expand an existing business than to buy one. The lender knows you can walk away from the business with none of your own risk put into it. There are SBA (Small Business Administration) loans, and equity investors who would give you money for a percentage of the profit of the business.
As a general guidance, you should find it next to impossible to get a million dollar loan on a million dollar business. A bank or similar lender doesn't want the business itself to have to sell it. That is not their business area. They might consider the physical assets involved and make a 70% loan on the value of the physical assets if you have a credit rating and history and plan to show they would get their money back on a payment schedule.
Too many people think they can do what you are showing. The saying – "You have to have money to make money" generally applies. A loan can leverage how much you have to work with.
Also, in starting a business, very often it takes two years to profitability. For an existing business, the cash flows and revenue and costs and profit needs to be carefully examined and verified. Someone getting into a business needs their own personal money to live on while waiting and working on profit.
Who is to decide a business is worth one million. Buyer and seller may agree, but a lender needs more than that if it's their money being used to buy it. Many lenders would want a few thousand dollars non-refundable just to have an outside analysis done.
There are a few problems with that:
1. The lender would have to carry our due diligence on the company and obtain independent valuations, together with strong indicators of the risk. That is an expensive process so they will expect to be paid in one way or another.
2. This assumes they think the business is a very liquid asset that retains value independently of it ownership. Neither is necessarily true.
3. What if the net worth of the business in a forced sale falls below the loan value? Why would they want to take that risk.
4. Financing the business entirely from debt means you have no stake in the game. That puts up your risk which puts up the interest rate on the loan which puts up your cost of capital. It's a non-starter.
I'd be very surprised if you find any lender willing to to talk to you on that basis. I wouldn't.
Collateral refers to a piece of property (usually physical) that a would-be borrower pledges to a lender in order to help secure a loan.
nobody is gonna loan you 1mill to buy a 1mill business
1) you have to put in some of your own money
2) you have to prove its worth AT LEAST 1mill to get anywhere near a 1mill loan
3) That IS the collateral unless you got something worth a lot more, then they will take THAT as collateral
Yes… in theory.
however – how do you value the buisness ?
The 'security' will have real security, eg equipment (at the second hand value), buildings that could be sold, etc etc..
They bank is not going to take the hyperthetical 'assumed' value that someone 'might' get on a good day with the right person being interested. – well unless valued by say 2 professional assessors..
Short answer – NO, it does not work the way you describe regardless of the type of business it is. Business loans are dependent on strong collateral and your "skin in the game."
Banks are notoriously conservative about valuing a borrower's assets for collateral. After all, if the borrower does default, the lender must expend resources to take the asset, find a buyer, and sell it.
You don't have a million dollar company because any ceo would not pull such a dumb move or should I say horrible unrealistic move.It would never happen or we would see all these ventures being funded with there current profits but we don't now don't we?
You can maybe get $200K for your milliion dollar business. Since it's not your business yet, then that's different.
that will depend if your going business is worthy to be collateral