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    6 Replies Latest reply on Mar 6, 2008 1:34 AM by FinanceHelp4U

    SBA backed loan questions. I need experienced answers!

    Nazenail Newbie
      This really seems to be the place I'm looking for! I've been looking around places like Yahoo Answers etc, but those places seem to be full of nonsense! I've carefully read through many posts here regarding SBA backed loans and have found some excellent information. As many previous posters have said, every situation is different and I still have a few questions regarding my options with a SBA backed bank loan.

      I have been actively looking for an existing, well established, profitable business to aquire. My wife, partners, and I have a good amount of experience in a few different fields of business. We've mostly been in managerial roles rather than the actual owners of small business. We've been saving money where possible and have around $300k in unencumbered cash available. We all have solid personal credit scores in the mid 700's. My wife and I own our home outright. It is worth around $150k. (we're in Texas in a place where $150k buys a nice new home)

      We have been looking at a few different businesses in the $750k-$1.5m range. To be able to more clearly ask my questions, I will briefly describe a few different businesses that we've investigated.

      $900k Casual Restraunt. Business only. (no real estate included) Gross Sales near $1 million. Cashflow just over $360k. Modest value in assets (kitchen equip, fixtures, etc)

      $1.2M Mexican Restraunt. Business and Real Estate. (RE value about $750k) Gross Sales about $900k. Cashflow around $300k. Minimal additional business assets besides RE.

      $950k Coin Laundry Business (3 locations). Business only. (no real estate included) Gross Sales about $750k. Cashflow around $340k. Again, minimal business assets.

      From what I can gather from several other posts and the SBA website, collateral may prove to be our biggest obstacle. Most of the businesses we look at are not rich in assets to provide collateral. Obviously the businesses with RE seem to do a bit better job of offering something in the way of security for the lender.

      What do the lender's guidlines require in the way of collateral for SBA backed loans. Is it expressed in terms of percentage? Do they need to cover 100% of the funds they lend with collateral? Is it a smaller percentage? How does the cash ($300K) that we put in get used? Is it considered a downpayment? Is it considered collateral?

      Onto the topic of personal guarantee and use of personal assets to collateralize the loan. As I mentioned, I own my house free and clear. Obviously the bank and I are at odds as to how my home is treated. I obviously want to not even bring it into the equation and leave it alone. The bank will want to plop a nice fat lien on it in case the business fails. What is my best course of action to protect myself to the greatest extent possible while still being approved for financing? Should I refi the home, strip all the equity out and use the funds if they're going to put a lien on it anyway? What happens if I sell my home and move to a different house while I have an SBA lien attached to the original house?

      I know that I've asked many questions here. I apologize or being so long winded. Thank you for any assistance that any of you may be able to offer. If I need to clarify any of my questions, I will be happy to do so!
        • Re: SBA backed loan questions. I need experienced answers!
          GrowthCurve Adventurer

          Whoa...restaurants and coin laundries...you're really not interested in having time off, are you?

          First of all, those are two very different businesses. I think you might want to give thought to what kind of lifestyle you want to live and how you really want to spend your days and nights. Personally, I think that if the the restaurant business is not a passion of yours, forget it. That industry has so many issues I don't know where to start. True, some people make a lot of money, but many go broke.

          As for coin laundries (and you were going to upgrade those to stored value cards, right?), those can be a great business, but make sure you're not getting taken by the seller. You have to do a make-vs.-buy decision, and you have to structure the deal so that you can manage the facilities for a little while before you actually close. Too much funny business in that industry.

          There are reasons that banks don't lend to restaurants or laundries with much enthusiasm. As you've said, part of the issue is the lack of collateral.

           


          You need to talk with a local banker who does SBA-backed loans. The ratios are going to vary, but on real estate you're probably looking at 75% to 80% loan to value. I don't think they will place a whole lot of value on the other collateral for these kinds of businesses. (The leasehold improvements in a restaurant are worth nothing, and while the coin laundry equipment has value, you have to remove it, store it, and then sell it...by the time you're done, you've probably net close to nothing from the sale.)

           


          Looking at your Mexican restaurant, you're basically paying $450K for the business and $750K for the real estate. The bank is probably going to loan you no more than $600K against the real estate. So, you'll need to put $150K down, and this will come from the $300K you have on hand. That leaves you having to buy the business for $450K, and you only have $150K left. I doubt the bank will loan you $300K, but you should ask and see what they will do. Odds are, however, that if you put $150K down on the business side, the owner/seller might consider taking a note for the balance of $300K. Many businesses are sold with the sellers taking back paper.

           


          As for your house, the bank is going to want to see that you have a stake in the business. You might be able to convince them that you've already put $300K into the deal, but they are probably still going to want a lien on the house. If they do this, you might be better off just borrowing, say, $100K against it through a HELOC and putting that into the business, too, as more of a down payment. (Of course, you don't want to be totally tapped out cash-wise...make sure you still have liquidity to pay bills and so forth, if you have a bad start.)

           


          As for that lien on your house, should the bank take it to secure your personal guaranty, they would not release the lien on the house unless you are able to provide replacement collateral.

           


          I hope this has been of some help.

          1 of 1 people found this helpful
          • Re: SBA backed loan questions. I need experienced answers!
            LUCKIEST Guide
            Welcome to this website. GREAT answer by GrowthCurve.
            It almost sounds like a fishing expo, or throwing darts and seeing which ones stick to the board.
            You need a Business and Marketing Plan on each of your ideas.
            Then we can talk.
            LUCKIEST
            • Re: SBA backed loan questions. I need experienced answers!
              PacificPizza Newbie

              Hey Nazenail

              Your post sounds pretty funny, exactly what I went through 9 months ago. I wanted to own my own business. I first looked into laundrymats and found a few. The only problem with it is if you have no experience running or managing one, or at least experience in knowing how washer/dryers are put together, it is risky business. Most laundry owners who wants to sell are going to tell you how great it is, and how much money it brings in, but then when you get down to it, "why are they leaving if it is making so much money with so little work?" Makes you wonder.

              After all those thoughts ran throught my head, i decided to look at work experiences I had. I graduated with my Master in Social Work, but while going through college, managed a pizza restaurant. I decided to open a pizza restaurant and received an SBA loan. Althought, I am only 25 years old, and working with lower numbers then yours, getting an SBA loan is all the headache they say it is.

               

              If collateral is needed, they will put a lien on your home, even if you have no equity in it or you own it out right. My loan was only for 80k, and I had 20k of my own money to put into the business. They still put a lien on my home, even though I had negative equity in it being that I bought it in 2005. I too had excellent credit. One of the major thing they looked for is a well written business plan and your experiences in the business. From what I found out, the reason why I got a SBA loan for my start up restaurant was:

              1. 20% cash injection
              2. Experiences in the business
              3. Collateral to back the loan.
              4. Good credit score.
              5. Overall, a good business plan and developed a great relationship in working out all the details of this loan with the V.P. of the Bank.

              From your situation, you have more options. I think you should be able to find a business to get into, with your collateral, cash injections, and credit score, especially if you have 3 people going into this thing together. If you are buying an existing business which has a profitable history, that comes into play also.

              That is just my two cent, again, I completed all my accomplishment at age 25, and according to the V.P., they dont usually give SBA loans to start up restaurants, especially to a 25 years old. This was the fourth bank I applied too.
              1 of 1 people found this helpful
                • Re: SBA backed loan questions. I need experienced answers!
                  Nazenail Newbie
                  Growth Curve,

                  Thank you for taking the time to reply to my answer. You have made some very good points and given me plenty to think about. You pointed out how time intensive these business are. My partners and I are intimately aware of this fact. My sincere question to you is what business doesn't take 100% of an owners time? I might be barking up the wrong tree!

                  Luckiest,

                  Thanks for posting. I may not have been clear enough in my post in describing my questions. My questions are regarding SBA backed loans, collateral, down payments, and personal guarantees. We are fortunate enough to have a "retired" business plan consultant on our team. Strategies are in place. Our deficiencies are primarily our limited cash ($300k) and our limited collateral.

                  Pacific Pizza,

                  Congrats to you! That's very impressive to me how much real world, hands on experience you have at such a young age. Thanks for sharing your experiences. It sounds like my house certainly has a huge bullseye attached to it. I will of course do whatever is necessary to make this all work, but don't want to take undue risks in getting there. How's business? Is it what you'd expected it to be? My best wishes to you!
                    • Re: SBA backed loan questions. I need experienced answers!
                      GrowthCurve Adventurer
                      My sincere question to you is what business doesn't take 100% of an owners time?

                      Any business can take up 100% of your time if you let it. But in some businesses, it's not even an option to work all the time; you don't have a choice. I view restaurants as one of those businesses, unless you're going to hire a real manager capable of handling the whole thing.

                      Actually, I don't like anything related to retail, but again that's just me.

                      With respect to a coin laundry, that can actually be run in such a way that you don't have to be there all the time, but if you ever get to have several locations, you'll probably have your hands full. It can be a great business, though. One of my most cash-rich customers when I did lending owned a dozen laundromats. The joke at the office was that he had a lot of money, but it was all in quarters. (Still spends!)

                      He net well over a half-million dollars a year from his little empire (and that was fifteen years ago), and he was very good with his money on top.
                  • Re: SBA backed loan questions. I need experienced answers!
                    FinanceHelp4U Wayfarer
                    Hi! I am a Financial Consultant. I worked for the U.S. Small Business Administration in the years past and have alot of experience in their arena also. With the scenario you are presenting, I don't see why you would have any problem obtaining a loan, with the amount of your cash injection, etc. If you choose to go the SBA route - remember that there are numerous Banks out there packaging SBA Loans for submission and alot of these Banks have their own "In-house" guidelines. In the past, I have seen some loans submitted from some of the SBA approved Lenders that were very lenient and then on the other side, I seen alot of submissions from approved Lenders that were very "stringent" following their own in house guidelines. You have to realize - The Lender has to be in their "comfort zone" when submitting your loan to SBA. There are many different loan packages and types which change with the type of loan in how much SBA is guaranteeing the Lender if you default on the Loan. So the Lender can lose quite a bit and must have their "ducks" in a row in order not to put too much of their loan funding "at high risk". Also, remember when obtaining an SBA Loan - YOU are paying a fee for the portion the SBA is guaranteeing that Lender. That can be an extremely high cost. Also, keep in mind - when a Lender quotes you a rate for an SBA Loan - it can be adjusted.....you didn't hear it from me..ha! ha! - sad, but it's true... That is why I always negotiate the best rate for my clients - because I am "in the know"....Additionally, most people are not aware and not informed by the Lender that they can ask for a certain time frame at the beginning of the loan of interest-only payments or even no payments for a certain time frame - most Lenders will not help you with this - but, I know some that will - and - believe me - that helps give you a better chance of getting your business up and running (makes things a whole lot easier - not having to worry about loan payments right "out the shoot", before any income is being generated. Again, I sorta have an inside track and working with the U.S. Small Business Administration has helped me in any endeavor I have attempted in my own self-employed life. It makes things alot easier when you know who to call, what questions to ask and know the verbage to use when asking/applying for the loan that can literally "make or break" you...so to speak.

                    ..and always remember SBA is not your only route - it is not for everyone - 9 times out of 10, when I get the full facts on what my clients are proposing to do - they don't need SBA anyway - "they are not a fit". When that happens, I proceed to offer them lots of options, which are much better suited to their individual situation and usually it saves them both time and money also.....

                    I help people with businesses, corporations, LLCs, etc., with obtaining the best financing to meet their particular needs. If you would be interested in speaking with me about the possibility of using my financial consulting services and expertise, please feel free to e-mail me at hardwork70@newwavecomm.net.

                    Thanks and hope I have helped a little anyway.....Carol