| >Commercial Loan |
| Posted by: hitech Aug 19 2004, 10:01 PM |
| My investment partner and I just started an LLC focused on real estate investing. We’re at the beginning stages and are about to sign the operating agreement since we are ready to start our first new construction and have several leads on rehabs. We’ve been a bit surprised at how quickly things have progressed since I started working with a sub-contractor friend of mine who wants to move up into becoming a general contractor. Basicly, we’re providing the financial backing and he’s running the jobs. We’re securing the funds through a private construction lender and following their guidelines. We just made a contact with a developer who offered us 4 prime lots in a booming area. Bottom line, since things are progressing so quickly, we’re trying to sort out the best way to put a large sum of operating capital, approx 200-300K into the LLC, either through a small business loan or other means, so we can operate on a cash basis with the rehabs while we work with the lender on the new constructions. Please help. |
| Posted by: loanuniverse Aug 20 2004, 10:07 AM |
| Ok let me see if I understood your situation: 1- You just started the company. 2- You are providing the capital, and your friend who is not a GC yet is going to help on the actual development. 3- The construction financing is in the process of being arranged ” We’re securing the funds through a private construction lender and following their guidelines.”. 4- You want to borrow about $300,000 for working capital. Looking at it from the point of view of a lender. A few negatives jump out. For example: – You are a startup. – Your operational guy seems to be lacking qualifications. – The construction lender will be way more secured in his position because this lender will have the liens on probably the only assets worth anything in your balance sheet. What is the lender going to finance? You are not a manufacturer / wholesaler or retailer. There are no receivables and your inventory is construction in progress, which is already pledged. In essence, you are asking the “working capital lender” to come in with a junior position to finance the portion of the projects that your construction lender is not financing. The lender is probably going to think “isn’t that what equity is for?”. The lender’s upside is limited by the interest rate and fees charged for the loan. Unless I read this the wrong way, I think that this money would have to be provided by the equity investors. Then again, I haven’t seen the balance sheet and a $300,000 loan might not be that big of a deal. Good luck |
| Posted by: hitech Aug 20 2004, 01:47 PM |
| I understand clearly your points and am well aware of the details of the upside and downside risks for individuals on both sides of the lending fence. We ( my investment partner and I who are the operations managers for the LLC who I believe are quite frankly “more than qualified” ) are securing the construction funds using personal assets i.e. ” the payment goes in our name ” if it comes to that and have been approved for well over the 300K number to do rehab, new construction, or investment properties. So, if I hear you correctly, you are suggesting there is no way to put operating capital money into the LLC beyond our own personal contributions and equity gains from investments to increase our growth potential? I suppose another option is to bring in another partner / investor to bring capital to the table. Where I struggle with this is … why is it so ridiculous to ask a lender to provide a loan for operating capital if my partner and I are putting our name / personal assets on the table? Especially since collectively our personal assets far exceed the requested loan amount. If we chose to budget the loan amount as a monthly expense and carry the loan over time all I can see is an upside for the lender. What am I missing? Please be careful with negative demeanor toward individuals in start-up positions who you perceive are lacking qualifications. When Bill Gates started Microsoft he was in the same position. |
| Posted by: loanuniverse Aug 20 2004, 06:14 PM |
| ”if I hear you correctly, you are suggesting there is no way to put operating capital money into the LLC beyond our own personal contributions and equity gains from investments to increase our growth potential? I suppose another option is to bring in another partner / investor to bring capital to the table.” Well, it does not look good not if the source of repayment is going to be the business itself. ” why is it so ridiculous to ask a lender to provide a loan for operating capital if my partner and I are putting our name / personal assets on the table? Especially since collectively our personal assets far exceed the requested loan amount.” It is not that the loan is unsafe is that the source of repayment is not there. A regulated lender should not use “liquidation of collateral” as the primary source of repayment. In fact, those in charge of maintaining the credit quality of a bank’s portfolio as well as regulators frown upon collateral lending. I could tell you stories about having very good collateral available, but not being able to get loans approved because the cash flow was not there or something being wrong with the borrowing entity. Having said that, your assets would help if you also have income that is not tied to the business. That is, you guys are keeping your day jobs and are doing this a side business. An argument could be made for your personal income to supplement the projected cash flow from operations. I think that the evaluation of a commercial credit is more of an art than a science. As loans get more complicated, there are ways to present the requests from a different angle that might make it viable without actually changing the underlying facts. Unfortunately, it has been my experience that a lot of bank business lenders lack the expertise to present their client’s best side to the credit portion of a bank. On the other hand, I am sure that you will be able to get some kind of funding from a non-bank lender. It might be more expensive. It might be in the form of a term-loan instead of a line of credit. However, the fact that you have hard assets to pledge at your disposal kind of assures you that someone, somewhere will be willing to lend or at least seriously consider lending. |
| Posted by: hitech Aug 21 2004, 07:09 PM |
| Now you see the picture clearly. We are exactly a couple of guys who still have their day jobs. Both of us are in automotive and do quite well financially. Collectively our annual incomes exceed the 190K Range so we feel pretty comfortable in making a payment if necessary. We are working through the details on the Legal and Tax Liability side with consultants to make sure we understand what everything means to both our personal and LLC bottom lines. The reason I’m pursuing the lending for capital option is in my mind it makes more sense to have the cash flow available in personal assets if required to support the LLC. Borrowing the money to put into the cash flow for the business gives us the ability to grow faster without absorbing much risk since the loan would secure significant cash flow. Certainly the goal is to grow the LLC so there are hard assets as soon as possible and things are going in the direction to make that happen. What type of organization would you recommend pursuing the funds? Do you think its possible to secure a commercial loan if we both sign-on as co-borrowers given our “payability” and then put the money into the LLC? Please let me know your thoughts. Thanks. |
| Posted by: loanuniverse Aug 22 2004, 03:32 PM |
| Hitech: The easiest way to do this would be for you guys to borrow personally {probably through some kind of home equity borrowing}, and then turn around and put the money into the company as a capital infusion. It would be risky because you would be pledging your house, but it might be the cheapest form of financing available. Would this be the best way to avoid tax or legal liability? I would think that the differences do not matter that much besides the fact that pledging your house puts it at risk. On the other hand, very few people qualify for $150,000 unsecured personal credit structured in a multi-year loan. {remember I am not an attorney or an accountant}. I also think that you might be a little unclear as to how a lender would perceive this. For example, you said something about a loan securing significant cash flow…. That statement did not make much sense to me. If you are referring about your personal cash flow securing the loan, that would not be the way that a lender sees it. A loan is only secured by collateral. The more tangible and liquid the collateral, the better. Cash flow is a source of repayment that can be affected rapidly. Can this be done with you two as co-borrowers…….. Maybe? It would still be an unsecured loan to a startup with management not experienced in the industry. I have to say that with the information available so far, I would not recommend such a loan. Good luck. |
