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This isn't just for online businesses - even a successful brick & mortar business will have difficulty borrowing more than its assets will justify. Online businesses, of course, tend to have fewer hard assets - limited need for manufacturing and storage, fewer receivables due to credit card business, no need for display inventory, etc.
Theoretically, a bank can loan against your cash flow, but this is riskier. If your business goes in the tank, the bank has nothing to seize and sell.
The other thing the bank is likely to demand is a personal guarantee. This is to keep you (as the owner) motivated to pay them back. They know if the business hits a rough spot, the owner might find it easier to cut his losses and fold the business - a personal guarantee keeps the owner on the hook. The good thing about a personal guarantee (if there can be anything good in that kind of arrangement) is that the bank may overlook the lack of hard assets in the business if they know you are good for it personally.
If you can avoid a personal guarantee, by all means do so. They will keep you awake at night if business times are tough. (Of course, that's why the bank demands 'em - they keep you focused.)
We just bought a vacation lake home, and we were able to use our online sales as income even though our past tax returns don't really reflect it. We have a Yahoo Store, and all figures can be downloaded from Yahoo without us being able to "doctor" them. Therefore, the bank accepted it. So, I guess that's one good benefit of a Yahoo Store.
We also figured a Valuation for our online business, and submitted this data to them also. I basically researched online for different ways to value a business. I ended up choosing one of the methods that actually valued the lowest. I didn't want the bank to think I was inflating things.
I am not really sure if they used this value as "collateral", but we did get the loan even though our tax returns wouldn't have qualified us.
I think in our case the more important thing was our flawless credit rating. If your credit rating is near the top of the scale, the banks will bend over backwards to find a way to help you. If they don't, find another bank.
I understand what you are saying, but I think a very large website, with solid reciprocal links, traffic, web presence, etc. has some "solidity" to it.
No sweat, my income has no outstanding debt and that is probably best anyway. One thing regarding a personal guarantee though, the payment on a $30-40k loan wouldn't even be 1/20th of what the site generates each month, so I'm not worried about not making the payment. But in my opinion, a personal guarantee is no better than an unsecured loan with nothing but a signature.
The income isn't really what I am referring to, but if the bank did take into account your Valuation, then yes, that is what I mean. I might look into an online appraisal site, but I think they usually overvalue a site.
Back to my "argument" for concrete assets. I understand what you mean and what the bank means, but somewhere down the road there will be a concrete valuation for a website/domain and the traffic it generates, including reciprocal links, etc. I think the reason it hasn't happened yet is that there is not enough solid evidence to back the idea up.
But as an example, say you have a 2500 square foot retail store on a side road in the desert of Arizona, what's it worth? Maybe $50k? If that?
But take that exact same 2500 square foot building and plunk it down on a major intersection of a high priced area in LA. Now what's that space worth? A million? Two million?
Traffic does matter, proven viable traffic does possess a value other than what you can feel and touch.
The argument wouldn't stand so well if you had a new website and lucked out on a high Google ranking, but I think it does hold up if you have several thousand reciprocal links, and well entrenched directory listings, search engine rankings across the web, etc.
It is just as likely that all the cars will stop driving down that high priced LA location as it is that thousands of related websites and major directories will all drop you at once.
So I think there is a concrete value that is not being accounted for yet. It might require certain legal or financial adjustments for domains as loan collateral. For example, the bank holds the domain name in escrow and verifies that you have ownership for the length of the loan, including paid up DNS for that time.
I know it sounds a little far fetched, but it will eventually come to pass as more and more business turns to the web.
And How does a bank value that?