This article are provided for information purposes only, and are not intended as legal advice.


Buying a business – advantages of securing financing before you find a business

January 5th, 2010

You are looking to buy a business and you will use the equity in your home to help finance the business but you have not found your dream business to buy yet.  If you know that interest rates will be increasing in the future, do you secure your financing now?

 

When you are employed, it is far easier to get a mortgage than if you are self employed.  The banker, when you are self employed looks at the company financial statements, your earnings etc.  If you are employed, the banker looks at your income and your credit score along with the usual credit analysis.  If you are making good money now but know that your income will drop when you buy a business, do you get financing now?  The higher your income, the higher the amount that you will be able to borrow on your house.  If you lock in to a 5 year mortgage, the banker will not review your financial affairs for 5 years even if your income changes because you become self employed.

 

There are several things to consider:

  • if you believe that house values will decrease in the next year when interest rates rise, then you will have more equity in your home now than later.  As a result, the amount that you can borrow now may be higher now if the house value goes down in the future
  • if you believe that interest rates will rise, you will be able to borrow more money now than in the future and at interest cheaper rates. 
  • if you have a higher income now, do you secure a mortgage now and lock in the mortgage for as long as possible?

 

You may be borrowing money when you do not need to however, arranging your financing or part of the financing to buy a business may save you money in the long term.  It will also result in you having surplus cash therefore you will be able to move quickly to close the business that you are purchasing.

 

It often takes up to 12 months to find a business therefore borrowing now may cost you money but if you invest the money temporarily, then it hopefully will not cost you too much and in the long run, you will have more financing at cheaper rates than if you waited until you find a business to buy.


Filed under: Buying a business — Gary Landa @ 10:44 am


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