Finance to buy a financial advice business is seemingly harder to source as traditional lenders appear to have raised their minimum loan requirements, according to John Birt of Radar Results.
Birt contends that the big four banks are now asking for an approved loan to be at least $1 million, although he says they may be more flexible if a loan is secured against residential property.
He explains in a recent statement that this has seen several non-traditional lenders surface to accommodate loans of between $250,000 and $500,000 by using the equity in the business they are buying. “Naturally, interest rates are higher due to the lender taking on a higher risk,” he writes.
But he is also encouraging his clients who selling are their advice business, but finding it difficult to attract a suitable buyer, to consider vendor finance. He says it is now becoming an alternative if the buyer is someone who needs traditional finance.
“While not ideal for many sellers, it can provide the solution to receiving the capital over an agreed period and at a reasonable interest rate on the deferred payments.”
Birt told Riskinfo that an example might be where a purchaser pays a deposit of 30 percent of the sale price and an agreement is drawn up for the outstanding 70 percent to be paid in installments over a five-year period with payments to include both principal and interest.
He says it is like any property mortgage, where a buyer pays the deposit and borrows the rest from the bank through a mortgage. With vendor finance, the vendor is acting as the bank.
Birt says some prospective buyers are keen on vendor finance as it is easier than trying to source other funding and the interest rate is not that much higher.
“It’s a good outcome for the seller to get the business sold,” he said, adding that it might take five years for the vendor to get the full price but in the meantime he or she is earning around 7.5 percent interest on the balance.
He believes vendor finance will become more prevalent in Australia.
Birt also noted that Radar Results, in conjunction with a specialist legal practice, will be running workshops on vendor finance during the first half of 2020. Click here to go to the website.