I am getting ready to apply for a loan for a retail business that is already established and I have read everything I can get my hands on trying to be prepared. It has been in operation for 40 years and I have been employed there for ten years. I have already spoken with a loan officer and am waiting on the tax returns for the business before I meet with him. My concerns are that I do not have a down payment, no real collateral to speak of and I grossed just under $18,000 in 2005. I have around $11,000 of personal credit card debt and I own a fully paid for 2000 Dodge Durango. My credit score is 708 and I am showing two derogatories, one late payment to a credit card in 2001 and a defective bowflex machine that was settled out (late fees were taken off in agreement)in 2005.

The amount I need to ask for is $582,000.00. The business I am purchasing grossed $329,525.19 in 2005 and was within $30,000 of this amount in the three years prior. I have projected the net income to be around 181,000.00 for the remainder of this year after I buy it. My father owns the business and wants to retire, so I have access to all of the financials. I calculated the annual maximum debt burden to be around $144,900.15 using 1:25x. The loan amount I want at 6.99% over 25 years would cost me approx. $48,916 a year in payments. If I did this right, then all of the figures look good. Right?

The store has no debt. All of the inventory is fully paid for as well as the building and the property it is located on. Although there has been no official appraisal done yet, a real estate friend said that the land and building alone were worth $300,000 to $350,000. There are several existing charge accounts, all of which pay within 30 days and all of them are business accounts. The store does not extend credit to its regular customers.

The loan officer mentioned an SBA loan since I did not have a down payment. Is it possible to get this loan with my personal credit as it is, no personal collateral and no down payment? Advice would be greatly appreciated.

LeighAnn:

I don’t see it happening with no down payment. Esentially, you are asking the lender to become an investor and assume too much risk without the benefit of an equity cushion. Remember that the lender is never going to make more than the interest rate, which means that there is too much risk for the level of reward.

There are actually two very different loans here. The first one is the one for the property and is the one that is more attractive to the lenders because of the tangible collateral. That loan’s backup source of repayment is strong. This means that if the business folds, there is still a chance that the lender will be made whole by selling the property.

The second loan is much riskier and involves financing the purchase of the ongoing operation. I can not think of any lender that would finance this over 25 years.

Talking to the local lender to whom you are already speaking and maybe another local lender at the same time would be the best. While the SBA could be an option, I do not think they would do this as presented based on the following:

1- No equity.

2- Part of the loan is for financing working capital, but you are assuming that they will be willing to amortize over 25 years.

3- The collateral for the real estate portion is good, but what will be the collateral for the rest of the funds? Think about how marketable any equipment or inventory will be in case of liquidation.

4- The rate seems low when prime is around 7.50% already.

If it does not work out with the lenders, you need to find out how you can make it work with your Father’s help. There is a $280,000 loan that is very possible for the acquisition of the real estate, but will your Father be willing to finance the rest?

Good luck

Thanks for the feedback. The interest rate I used was one that popped up on a loan calculator on my banks website so I was expecting one higher than that. The length of the loan, I figured I would have to change as well.

As far as the inventory goes, the store sells electronics and musical instruments and all the accessories. The in-store inventory and back-stock is probably worth somewhere between $300,000 to 450,000 or more at cost. I haven't really gotten in to the inventory a lot and I know there is a ton of merchandise in back-stock. Can the inventory be used as collateral? If so, how do I judge its value? Do I figure on dealer cost or retail value?

The store also has a in-house technician who does repairs on most of the types of electronics we sell such as amplifiers, CB Radios, scanners, electric guitars, PA gear, etc. He will be staying on if I buy the store.

When inventory is financed, banks keep advance rates at 50% of cost. However, the loans used for this are short-term in nature.

I think that the only way to do this is for your dad to finance it. A lender can be easily obtained for the property {assuming is not in a blighted area with large vacancies}, but getting someone to finance the actual business purchase will be difficult at best.

The problem with this is that your dad can not just forget about the business.