This Is How Banks Look At Funding

A little bit of a rule of thumb, in terms of how banks will look at some of the funding, the first one there is a bit of a shared risk. Banks are going to want to know that the owners of the business have got some skin in the game. An industry term  is ‘hurt money’, which basically looks at a shared risk position so that if the banks and owners are coming in, and both parties are contributing to the success of that business.

That may come in the form of cash. Their buying a business for $200,000, customer puts in a hundred thousand, bank puts in a hundred thousand, fairly straightforward sort of transaction or an equity contribution. That equity may come from a residential or a commercial property. And banks will look at those up to 80% of the value of the property for residential, 70% of the value of property for commercial. Important to note, less any existing loan that is already against that property. It is looking at an equity position up to those numbers. 

Potentially, it may be a situation where if there’s equity in a property, we actually look at increasing a home loan or a loan against that property to generate some cash to then contribute the cash to the business purchase, as opposed to putting the property in as security. That becomes a conversation we’ll have about the positives and negatives of each option and which way it works for the business owner to structure their funding. You may end up with, if a business is under a particular franchise agreement that may have preferential funding with the bank, there could be security around that that allows the bank to get a bit more comfort. 

If you’re buying a McDonald’s franchise, for instance, you’ll probably get a higher lending than a 50-50 because of the brand behind that business, as opposed to maybe setting up a florist in a strip of shops, that would probably book back to a 50-50 side of things. So the franchise or industry or brand behind a business can also help in terms of how much equity you need to contribute to that purchase.

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