Ok, maybe the Golden Rule is a bit of a stretch when talking about financing, but the reality is that you have to be willing to give something in order to get, and that definitely applies to business financing. This post was prompted by a call from a prospective client yesterday. She and her husband were referred to me by a local commercial realtor and they were trying to purchase a commercial property. As is normal, I spoke to the prospects on the phone for about 20 or 30 minutes to find out information about the property, about their business, and their personal situation related to credit, assets, and income. I knew after several minutes of the conversation that there was nothing I could do to help the couple. It wasn’t that they were bad people or had poor credit or anything like that, but several key elements existed in their situation, one of which was insurmountable that would prevent me from helping.
The first issue in their situation was that the business they would operate in the commercial location was a startup used car dealership, which in itself may not be a deal killer for a loan, but neither the husband nor the wife had any previous business experience in operating a car dealership. Neither the husband nor the wife had owned a business even in a different industry. The husband had sold a few cars of his own over the years, but he had never even worked at a car dealership. So, the question in my mind was….what qualifies the couple to start a business in an industry neither one had any experience in. Experience in business ownership and experience in the particular industry are key elements that lenders want to see to feel confident that someone can repay a loan. When I suggested that perhaps one of them gets a job at a similar company for a time to gain experience in the industry, the response was “we don’t want waste our time working for someone else; we just want to open our own company.” Since the neither the husband nor wife had experience owning a business nor in the type of business they were going to open, I knew a lender would be reluctant to give them a business loan.
The next issue in their situation was that the couple had very little money saved up to use as a down payment and working capital. I had mentioned that the minimum down payment requirement for a Small Business Administration (SBA) loan to purchase real estate was 10%, if all the other qualifying factors could be met (which they were not, by the way, and is another topic all together). The purchase price of the property was $159,000. The couple had $14,000 saved up to start the new business. Not only was this amount not even 10% of the purchase price for a use as a down payment, but it would have left nothing to actually RUN THE BUSINESS. When I asked about this issue, the response I received was “Well, we do have a little bit more money saved up, but we don’t want to use all of our savings for the business.” I wonder never advocate putting a family at risk, but business owners have to be willing to use their own personal capital first before a lender is willing to extend financing.
As I was working through the possible scenarios I could use to help this couple purchase the commercial property, I knew that I would not be able to get them a business loan. My thinking turned to personal loans that they could use for the business. Naturally, one of the most valuable assets that people own is their homes. The couple did own a home and had been paying on their mortgage for just over 10 years, so they figured there was likely some equity. I suggested that they refinance their home to cash-out some of the equity to use for the business. The wife answered “No, we have been paying on our mortgage for 10 years; we don’t want to start all over for the business.”
Hopefully by now it is becoming clear to you what the insurmountable issue was that led me to the conclusion that I could do nothing to help this couple. The insurmountable issue was that the couple was not willing to give up anything in order to get the capital they needed to buy the property and to start the business. They didn’t want to give up their time to gain experience; they didn’t want to give up their hard earned savings to put into the new business, and they didn’t want to put at risk their personal assets to use as collateral for the new business. By the end of the conversation, I wondered to myself why a lender would want to give them a loan, if they didn’t want to give up anything in return. The bottom line is this: if you are starting a business, you need to decide what you are willing to give up in return for the funding you are asking for.
The first issue in their situation was that the business they would operate in the commercial location was a startup used car dealership, which in itself may not be a deal killer for a loan, but neither the husband nor the wife had any previous business experience in operating a car dealership. Neither the husband nor the wife had owned a business even in a different industry. The husband had sold a few cars of his own over the years, but he had never even worked at a car dealership. So, the question in my mind was….what qualifies the couple to start a business in an industry neither one had any experience in. Experience in business ownership and experience in the particular industry are key elements that lenders want to see to feel confident that someone can repay a loan. When I suggested that perhaps one of them gets a job at a similar company for a time to gain experience in the industry, the response was “we don’t want waste our time working for someone else; we just want to open our own company.” Since the neither the husband nor wife had experience owning a business nor in the type of business they were going to open, I knew a lender would be reluctant to give them a business loan.
The next issue in their situation was that the couple had very little money saved up to use as a down payment and working capital. I had mentioned that the minimum down payment requirement for a Small Business Administration (SBA) loan to purchase real estate was 10%, if all the other qualifying factors could be met (which they were not, by the way, and is another topic all together). The purchase price of the property was $159,000. The couple had $14,000 saved up to start the new business. Not only was this amount not even 10% of the purchase price for a use as a down payment, but it would have left nothing to actually RUN THE BUSINESS. When I asked about this issue, the response I received was “Well, we do have a little bit more money saved up, but we don’t want to use all of our savings for the business.” I wonder never advocate putting a family at risk, but business owners have to be willing to use their own personal capital first before a lender is willing to extend financing.
As I was working through the possible scenarios I could use to help this couple purchase the commercial property, I knew that I would not be able to get them a business loan. My thinking turned to personal loans that they could use for the business. Naturally, one of the most valuable assets that people own is their homes. The couple did own a home and had been paying on their mortgage for just over 10 years, so they figured there was likely some equity. I suggested that they refinance their home to cash-out some of the equity to use for the business. The wife answered “No, we have been paying on our mortgage for 10 years; we don’t want to start all over for the business.”
Hopefully by now it is becoming clear to you what the insurmountable issue was that led me to the conclusion that I could do nothing to help this couple. The insurmountable issue was that the couple was not willing to give up anything in order to get the capital they needed to buy the property and to start the business. They didn’t want to give up their time to gain experience; they didn’t want to give up their hard earned savings to put into the new business, and they didn’t want to put at risk their personal assets to use as collateral for the new business. By the end of the conversation, I wondered to myself why a lender would want to give them a loan, if they didn’t want to give up anything in return. The bottom line is this: if you are starting a business, you need to decide what you are willing to give up in return for the funding you are asking for.
