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

Buying a business – can you finance any type of business?

October 3rd, 2008

Prior to the meltdown in the banking sector, it was difficult to finance certain type of businesses.  The laws are different if every country.  For example, in Canada, bankruptcy laws give priority to creditors who sold product to the company within 30 days of going bankrupt.  As a result, the banks or any creditor other than the supplier, may not be able to seize all the inventory in event of default and bankruptcy.  Therefore, the banks are not willing to lend against 100% of the inventory.  If inventory turnover is high, for example in a grocery store, the inventory may be less than 1 month old.  For small companies, the banks may not provide any financing since there is no security that they can seize in event of a default.


The owners of private companies often do not want to pay tax so they reduce the profits of the company by expensing many non business items.  On one hand, this may reduce the taxes that are owed to the government but the banks want to see retained earnings and a history of profit.  If the owner has a large component of cash in the business that is not recorded in the accounting records, the banks will not give any value to something that is not documented. 


If the owner of the business takes out bonuses and management salaries to decrease taxes, the banks may give the company credit for profitability and will normalize the owners salary and treat the excess salary as profit.  If the owner puts expenses through the business to accomplish the same reduction of taxes, the banks may not normalize the profits of the company. 


In summary, the goals of the owners of private businesses is to maximize the cash in their personal pocket but this goal may reduce their ability to get bank financing because there is no accumulated assets left in the company.

Filed under: financing - difficulty finding it? — Gary Landa @ 9:16 am

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