Board Topic: Small Business Loan question
Click here to view this topic in its original format
LoanUniverse Community > General Chat >

Small Business Loan question

Posted by: Guest Jul 16 2003, 10:13 PM
I don't know if i'm going to get laughed at. I'm in a funny situation. I'm 19 years old, I've been working at a deli for about 2 years now, and it's for sale. The owner would love to see me and a potential partner, a 44 year old woman whom is also an employee, take over, provided we can come up with the money. Problem is, we both technically "have no job" if you know what I mean, and i have no credit, and own nothing (a car in my name, house). The business has been around 12 years, and makes excellent money, it's rock solid, with an established clientele, and the clientele "knows us" and will still be there. Buyers that have money are starting to become interested, and times running out. The amount is $150.000, and i need to get half if i can. Should i bother with banks? Should i go for an "as seen on TV high-interest no-credit loan, or am I dreaming?

Posted by: loanuniverse Jul 17 2003, 10:12 AM
As a current employee of the place for sale you are in an excellent position to determine whether or not this would be a good investment. With the amount of information you have provided, I would have to say that there is next to no chance that you will get financing from a Bank. However, I do not want you to get discouraged. Please read my whole response and take my advice into consideration.

Lets start by identifying the problems that I can see off the top of my head regarding your situation:

1- Experience managing a business.
2- Lack of financial resources.
3- Industry (Restaurant)
4- Lack of detailed financial information on the business.

Now lets see if we can address some of these deficiencies:

Business experience While most lenders will like the fact that you have been working at this place for a couple of years, they are going to ask themselves if you will have the experience to deal with landlord matters, manage the books, pay vendors etc. It is one thing to manage the counter, it is another to manage the business.

Lack of financial resources This is a big one and I can not see any way to get out of it. Lenders like to see a commitment from the owners in the form of their own money invested in the company.

Some thoughts:
- Is the current owner willing to finance the purchase?
- Is he asking for you to come up with half now and then you owe him half?
- Depending on the amount of equipment that the Deli has, it might even be cheaper to open a new one. Do the following to get an idea of the value of the equipment {make a list of everything in the Deli, the counter, the grill, the display case, the soda case, make sure to include all. Then look in the yellow pages for restaurant supplies and go price the stuff yourself} You might be surprised to find out that buying new equipment and setting shop across the street might only cost you $50,000.

Industry Banks usually do not lend to the food service industry. Restaurants have the highest default rate of any business. Do you know that a Bank is lucky to get $0.10 cents on every dollar of used restaurant equipment. The reason is that most restaurant owners like to buy new equipment.

Lack of financial information Saying that the business makes excellent money does not mean much. You need hard numbers. Ideally, you would like to see financial statements and corporate tax returns for the last three years. You can either ask the owner for this information or come up with your own evaluation.

The formula for your own evaluation is simple:

Sales amount spent on goods {meat, bread, lettuce, etc} = Gross revenue
Gross revenue operating expenses {salaries, rent, utilities, etc} = Operating profit

Once you get the operating profit, is it big enough to pay for the loan?

Hope this helps

Posted by: Rick Aug 8 2003, 01:12 PM
As a follow up to the above, it would not hurt to check to see if your State/Province has a small business program designed to help youth and or small business in general. Also, a complete business plan with sound financial projections is generally required before most (credible) lending organizations will even consider the proposal.

A final thought, obtaining 100% financing (i.e. not putting your a$$ on the line with some of your own equity) is very difficult for established companies with good management let alone what essentially amounts to a start up. You will have a much better time getting interest from a lending org if you have some of your own money to put into the purchase of the business.

cheers

Posted by: loanuniverse Aug 8 2003, 06:47 PM
QUOTE (Rick @ Aug 8 2003, 01:12 PM)

As a follow up to the above,  it would not hurt to check to see if your State/Province has a small business program designed to help youth and or small business in general.  Also, a complete business plan with sound financial projections is generally required before most (credible) lending organizations will even consider the proposal. 

Thanks Rick {approaching the local Government and finding out about local programs} is a good idea that had not ocurred to me.

Very nice contributions.
email

Comments are closed.