Board Topic: small business loans
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small business loans

Posted by: Want-to-be-business-owner Nov 5 2003, 01:14 PM
My husband and I are looking at purchasing an existing retail music store in town and we are going to have to get a loan to make the purchase. Unfortunately, every loan agent I've spoken with so far wants our real estate as collateral against the loan, even though there are capital assets we are purchasing with the business (instruments, etc.). Does anyone have advice on how we can get a small business loan without having to put up our house as collateral? Any thoughts are appreciated, thanks!

Posted by: loanuniverse Nov 5 2003, 02:33 PM
Let me address your situation the following way:

When you say “every loan agent that I have spoken with…”, who are you speaking to? The right person that you need to be speaking to is a loan officer, a small business lender or a commercial lender. The name agent implies that the person does not work directly for the lender, but instead acts as an intermediary. Why would you go to an intermediary?

" wants our real estate as collateral against the loan" It might well be that the loan is not doable without additional collateral to mitigate some weakness. At first glance, the requirement of a mortgage on the house seems to me like is being used to mitigate a highly leveraged purchase. Then again, it could be being used to either mitigate something else or to package the loan more as a home equity than a true business loan.

In other parts of my website, you will see references to a term called “loan to value”. This term is used a lot in real estate financing. In business loans the terms that are used the most are “leverage” and “debt to worth”. In the case of a business a lot of banks do not like to see the debt to tangible net worth higher than 3.00X. This means that if the business assets are $120,000 {purchase price} then the ratio of liabilities to equity can not be any higher than $90,000 in debt to $30,000 in equity. The 3.00X maximum debt to worth is not a hard rule and some banks might be more lenient, while others more strict. The bottom line is that a bank might only be willing to finance 50% of the purchase price, while another one might be willing to finance 75% of the purchase price.

In addition, the willingness of the bank on doing the loan will depend on a lot of other factors such as your experience in the industry, the financial performance and condition of the business being purchased and your personal credit just to name a few. When it comes to small businesses, the personal credit plays a large role.

In conclusion, I can not really tell you if the loan can happen without having to pledge the RE as collateral. I have the impression that the people that have told you that you need to pledge the RE have not done an analysis of the business being purchased. While I can’t give you an answer let me leave you with the following feedback:

- The source of repayment for a long-term business loan such as this is the cash flow from operations, the lender will need to analyze historical financial information in order to determine if this is enough. In addition, you need to access this information in order to determine if the price is fair.
- It might be that the “loan agents” that you have talked to are taking a look at the request and realizing that the amount of money that you are asking to borrow is such a high percentage of the purchase price that they won’t even consider the deal unless you pledge the real estate.
- Consider taking advantage of governmental programs designed for the small business person. Assuming you live in the United States, the SBA really does work, and I suggest you visit their site.

Hope this helps.
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