FORTUNE Small Business: | |
Should I buy a house first, or a business?
Ask FSB weighs in on whether it's wise to buy a house before seeking a business loan.
(FORTUNE Small Business) -- Dear FSB: My friend and I are planning to buy an existing business. My friend owns a house, but has no equity, and I'm in the process of buying a house. Will purchasing one affect our chance of getting a business loan from a bank? What would be best - to buy a house first, or buy the business first?
- Paolo Perez, Fountain Valley, Calif.
Dear Paolo: If you have sufficient income to fund the purchase of both a home and business, the order in which you do it shouldn't be an issue.
According to Christy Schmitt, senior vice president of small-business banking at the Union Bank of California, banks will dive deep into your financials when deciding whether or not to grant a business loan - but taking out a business loan when money is tight could affect your ability to get a house. She advises that you wait until you have sufficient cash flow for both to do either.
But if you want to make a move now, Mark Hogan, the president of small business banking at Bank of America (BAC, Fortune 500), suggests that you buy the house first.
"When you're looking at a mortgage in today's environment, everything needs to fit neatly," he says. According to Hogan, a mortgage doesn't count as a negative to bank lenders, but a business loan is a potential negative for mortgage companies.
What does matter to banks?
"They'll want to look into the financials of the business you're buying - is it running well? Does it have a good client base?," Schmitt says.
Hogan adds that they'll ask what your cash flow looks like and how you've paid debt in the past. And while building equity looks good to bankers, in California's currently wobbly real estate market, buying a house might not add much value.
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