Commercial Loan and/ or Guarantor Loan info

johndowy on 14/12/2022 - 11:43

Hi Everyone,

Just looking for some info on commercial/ business and guarantor loans.

I'm currently unemployed and I wanted to buy a small business with an asking price of $300,000.

I don't have that kind of money but do have equity available in my home. Would I be able to borrow that full amount from the bank using the equity from my home? The business makes about $100,000 after tax.

Also, in another scenario, I wanted to help my partner buy a house but she does not have enough for a deposit. Can I go guarantor for her loan even though I am not working and don't have an income at the moment? Do the banks need to see if I can afford to pay the monthly repayments if she cannot?

Financial Loan

Comments

  • dwillia on 14/12/2022 - 12:04

    I wanted to help my partner buy a house

    is this a good Idea? What if you seperate?

    • MITM on 14/12/2022 - 13:01

      Then OP would get half the house.

      • Quantumcat on 14/12/2022 - 18:36

        If only a little bit is paid then the girlfriend would be taking half of OP's deposit with her

    • HeWhoKnows on 15/12/2022 - 19:09

      All OPs answers are with his bank?

      Why is OP asking us when its a simple phone call to the bank?
      If the bank says NO then thats it.
      If they say YES then great.
      Nobody here is going to affect that outcome

      What a serious waste of OB time

  • Mulga Bill on 14/12/2022 - 12:08
    +2

    I work for a bank but I don't work in the business loan sections

    (Not 100% sure but…) For the business loan you may be able to use financial projections to show how you will be able to meet the loan repayment but this may depend on the type of business, how long its been running, past profitability, your experience etc. If its a franchise some banks have a specific franchise policy (for affordability and security) and/or they will use your home as security.

    For home loans we do assess the guarantor as if they are a borrower so need to afford the loan themselves. In your case though if you go on the loan with your partner you can potentially be a borrower and not a guarantor so your joint income would need to show the loan is affordable…you will likely need to be on the new property title though unless you fit within the "substantial benefit test" your bank uses.

    • johndowy on 14/12/2022 - 12:47

      It seems like I need to make sure that the business is legitimate and has the right income to service the loan.

      For the home loan, if I go on the loan with my partner wouldn't that be worse in our situation?

      Because, I still have a mortgage on the house (in my name only) but no income. She has income and no liabilities. If the banks reassessed my situation, wouldn't they say that I technically cannot even afford my current loan since I have no income and am living off my savings for the moment?

      That's why I thought I could guarantor and she could service a bigger loan instead of going joint because I would drag her down.

      • newjerseydamo on 14/12/2022 - 13:28
        +5
        • It seems like I need to make sure that the business is legitimate and has the right income to service the loan.

        You should be doing this regardless. Why would you buy a business if you don't know if it's legitimate or able to service the loan?

        Sounds like you need to speak to some professionals rather than some random people on the internet, this all sounds like bad ideas after bad ideas.

        Also looking at your post history, you've gone from being a dietician, to wanting to study to become a financial planner, to wanting to buy a cafe, all in less than 12 months. Plus currently unemployed.
        I can't see this ending well.

      • blitz on 14/12/2022 - 15:26
        +5

        I have no income
        I could guarantor

        Without more information, we can't tell you whether this is a bad idea or a really bad idea.

      • Mulga Bill on 16/12/2022 - 14:07
        +1

        You are right, if you have a loan while unemployed it will worsen the situation…so helping your partner is probably not an option.

        Instead have them look up these government schemes to help those with low deposits
        - Australia wide https://www.nhfic.gov.au/support-buy-home/first-home-guarant…
        - VIC also look into https://www.sro.vic.gov.au/homebuyer
        - NSW also look into https://www.nsw.gov.au/housing-and-construction/shared-equit…

  • trapper on 14/12/2022 - 12:09
    +3

    I'm currently unemployed.

    I'd be surprised if the banks will want to lend you anything really. What did you earn in the last tax year?

    • johndowy on 14/12/2022 - 12:48

      I am hoping that they would look at the business income and say that I'd be able to service the loan with the profits generated from the business.

  • Typical16-bitEnjoyer on 14/12/2022 - 12:29
    +4

    $100,000 after tax

    Forget all your questions for the time being and spend a week or 2 verifying beyond absolute doubt that figure is true, and has been similar for recent FYs, before anything else.

    • bmxr on 14/12/2022 - 12:32
      +5

      This.

      Do your due diligence twice and then get someone else to do it again.

      • johndowy on 14/12/2022 - 12:49

        It's a small cafe owner-run business. They don't hire a manager to operate things so the owner takes all the profit. If they did hire a manager, it'll probably be half that amount but at least it would be somewhat hands off.

        • AustriaBargain on 14/12/2022 - 13:06
          +9

          You expect a manager to work full time managing a whole cafe of any size for 50k a year?

        • freefall101 on 14/12/2022 - 13:24
          +10

          What are the opening hours of the cafe?

          That, plus a couple of hours opening/closing, multiplied by a minimum of $50 an hour will be your manager. If that comes out to 40 hours a week it's at least $100k a year.

          I worked as an accountant, I saw way too many people buy into cafes as their dream job of being their own boss and all of them tended to work 80 hours a week. $300k cost for a business that makes $140k year profit before tax is way, way too good to be true. That they're telling you the profit "after tax" is a massive red flag in itself, is that cash in your hand or after 30% corporate tax or 15% because it's held in a trust or what?

          • GourmetFoodie on 14/12/2022 - 13:55

            @freefall101: Best comment of the thread

          • johndowy on 14/12/2022 - 15:15

            @freefall101: Cafe managers earn that much (better off being a cafe manager than take on the risk).

            I figured a cafe manage would be in the rage of $60-70k.

            • freefall101 on 14/12/2022 - 18:18
              +3

              @johndowy: 60-70k salary, plus super, payroll tax, workcover, overtime/loadings, the cost of finding someone to cover their leave and you'll be up around $100k pretty quickly. It's not just what you're paying them, you need to take into account all costs. Even the cost of hiring them, running job ads, this keeps eating into your time.

              Plus the numbers don't add up for a single manager. $140k a year profit, if it's a 10/15% margin on all costs you're looking at $100k revenue a month. A cafe that size you're likely to need a couple of managers rotating or someone nuts enough to work 80 hours a week without getting paid properly.

              If you're going to buy it make sure you look very closely at the timesheets and salaries being paid, the stock movements and customer movements. If they're making that kind of money off half a mil of revenue a year then they're cooking the books or they're laundering money or something.

              Or get some real help. That you're asking the internet is a bunch of red flags all in itself, because none of this sounds reasonable.

            • Typical16-bitEnjoyer on 15/12/2022 - 08:33

              @johndowy: Wait until you find out what absolute entry level staff get paid (deservingly).

        • websterp on 14/12/2022 - 13:29
          +7

          Go park your car near the cafe and observe in-out foot traffic for a week or so during peak/off peak hours. Regardless of what is on the books, this would give you a much more realistic idea on how the business is doing at the moment and what your future prospects are.

        • Typical16-bitEnjoyer on 14/12/2022 - 13:39
          +7

          small cafe owner-run business

          One of the absolute easiest business types to fudge the numbers and/or cook the books.

          Go through their books entirely. Get an accounting professional to double check. Go back through previous years. Sit down at a neighbouring business and jot down the head count of customers you see over the course of their entire opening period. Send friends and family in there to 'mystery shop' and see how the business operates. You looked at the Lease yet? You checked if the business has any creditors? Do you even have an accountant? Have you run a hospitality business before? Have you undertaken - generally free - business training by your State Gov?

          Too much work? Then running a cafe will be too much work for you too.

    • trapper on 14/12/2022 - 12:36
      +1

      Yeah seems very sus

  • MITM on 14/12/2022 - 13:05
    +2

    See a business broker and pay him/her $500 to commercially value the business as if he was selling it. Same as you'd get an independant valuer when buying a house. Pay for the truth.

  • GourmetFoodie on 14/12/2022 - 14:13
    +2

    The business numbers don’t add up to me on face value. See the comment by freefall101 and all the other great tips on how you can verify those numbers.

    Working backwards, hospitality margins are often less than 5% which is why so many businesses fail.

    Let’s be generous and say 10% revenue margin
    Supported by the ATO https://www.ato.gov.au/Business/Small-business-benchmarks/In…

    So if it’s bringing home $100k a year it would have to be doing turnover of $1 million a year! That is a lot of sales for your standard suburban cafe.

    This is basic stuff and the bank will do these numbers as well and won’t lend you the money based off of it.

    You COULD draw down on your home loan if you have a re-draw facility which is what many people do when starting a small business. I would not recommend this as if the business fails, you may lose your house if you can’t pay the higher loan and with interest rates only going up…very risky. A lot of people do these small businesses in partnership to spread the risk but again, you may lose friendships if things go wrong. If you are really interested in running a cafe I’d go and work in one for a year under someone else’s leadership then you will have more insight into the industry rather than going in cold ready to be taken advantage of.

    As for being guarantor on your partner’s loan. The bank will look to see if you can pay the loan if your partner cannot. There is no way they will let you be a guarantor given you are unemployed and have your own debt. Your existing debt will also be taken into account so even if you are employed, they will subtract your interest payment obligations on your own debt.

    Your best bet would be to buy a property with her as joint owners and then any spare debt capacity you have beyond what you currently have, could help increase the price of what she can afford. Bear in mind, you will be jointly responsible for the interest payments so this is not an arrangement you should set up without legal advice. Also it’s a falling market so not a great time to buy. Think carefully…

  • Seraphin7 on 14/12/2022 - 15:45
    +3

    Strewth. Where to begin?

    On the basis of being unemployed, we may as well say that your ability to get at least a "normal" loan is effectively zero. Responsible lending requirements have made it such that lenders must be certain you are able to service the loan based on your income and subject to their calculation methodology. We could be here all day going through the ins and outs of this, and all the scenarios and exceptions, but that's basically where you are.

    As for a "business loan", again, it's just not going to happen in this context. Most "business loans" of this type are just home loans in that they are secured against residential property, not the assets/cashflow of the business.

    Realistically then, if you have a current home loan and wish to redraw/access offset funds against it, go for your life, but I don't think any mainstream (or even significant secondary) lender is going to provide fresh credit in this scenario.

    Same applies on the guarantor question. You may be able to assist on the LVR/security side of the equation, but from the lenders' perspective there will be "issues" here.

    As others have said, be very cautious about buying into a business such as the one you have described. You need to understand whether or not it actually earns the quoted numbers … there are any number of well documented ways in which small outfits such as cafes can make the "profit" numbers anything you want them to be. This is even before you get to whether those numbers are sustainable, whether you actually can run a cafe, how much financial buffer you have, external factors beyond your control/influence, etc., etc.

  • spackbace on 14/12/2022 - 16:59
    +6

    Based on your comments and posts:

    1. Don't buy a cafe
    2. Don't become a financial planner
  • djones145 on 14/12/2022 - 19:07

    should consider getting 10 homes loans, with the house as leverage. mate its buy buy buy
    what can go wrong
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    this is troll advice and does not take intobaccount all troll information in the post

  • Zeph101 on 14/12/2022 - 20:17

    If the only reason the Cafe makes any $$$ is because it has a super awesome barista/owner that will leave one the cafe is sold then whatever business you're buying is worthless is you can't make coffee

    • spackbace on 14/12/2022 - 20:24

      Or even worse, it could have shit reviews and you could never improve it without a name change

  • miwahni on 14/12/2022 - 23:46

    Leaving aside the assumed profitability of the cafe - even with verified profitability very few banks will lend that sort of money to someone with no experience in running a business, and the one or two FIs you find who may be willing to lend will charge an arm and a leg. Risk = rate.

    And as others have said, guarantors need to evidence servicing in their own right, because the bank's recourse is to chase the guarantor if the borrower defaults.

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