The Truth in Lending - What Buyers and Seller Need to Know About Financing
National Kennel Sales & Appraisals have a strong relationship with Wells Fargo SBA Lending and other SBA lenders. We are successful in obtaining financing for all the listings we accept and assist the buyer and seller throughout the process.
In most cases, the purchase of a boarding facility consisting of real property and an on-going business, is best financed with an SBA guaranteed 7(a) loan. SBA stands for Small Business Administration, which is a federal agency that guarantees (ie. insures) the loan to a certain amount to the lender. The SBA does not make any loans nor provide grants, which is a common misconception. A lender, such as Wells Fargo, PNC Bank, Bank of America, etc. underwrites the loan and provides the funds, the SBA guarantees the loan to the bank in case the borrower defaults. The SBA has two loan programs that are suitable for kennel financing, the 504 and 7(a); most of the time the 7(a) program is best suited as 504 only finances real estate. For information on the 7(a) loan program, please go to: https://www.sba.gov/7a-loan-program.
For a loan application to be successful, the lender will require the following:
Correct Pricing & Appraisals: During the application process, the lender will order a real property appraisal AND a business appraisal. Both have to appraise to the contract price. Proper pricing from the 'get go' is a must.
Debt Servicing & Cash Flow: The business has to generate enough cash flow to service the debt on the loan and provide buyer an income. Cash flow is loosely defined what the business generates after all expenses are paid, including buyer salary. We analyze all of our listings for sufficient cash flow to qualify for financing before we sign a listing agreement.
Buyer Requirements: Buyer needs to have either direct industry experience or transferable business skills, very little debt, good credit score and at least 15% in cash as a down payment.
Other forms of financing:
Conventional Commercial Loan (no SBA guarantee): At times, if no business Goodwill is being financed, a kennel property can be financed with a conventional commercial loan from your local bank. These loans look to the business cash flow as first source of debt re-payment, the buyer down payment is upwards from 25% to 30%, little less paperwork and quicker closing.
Seller Financing: Sometimes, seller will need to participate in financing to get a facility sold. If the lender determines that there is some added risk in the loan, they might require the seller to finance up to about 10%.
We have all heard those horror stories of how a buyer 'ran the business into the ground in 6 months' and the seller never received their money. Unfortunately most of the time those stories are just that, stories. When properly structured and with attorney drafted security agreements in place, the risk can be mitigated. The stronger the business, the less likely that seller will need to offer some financing. Seller financing can have considerable tax benefits, so discuss the option with your CPA.