Hello, and a funding idea

MattTurpin

Hello everyone - some nice looking forums you have here. I`m in the early phases of starting a cafe. I have a consulting firm on my side, best decision I ever made. I have a loan officer who genuinely seems interested in my different take on the cafe business. However, I`ve hit what will probably be the largest stumbling block in the entire endeavor. Startup capital. This is my first attempt at entrepreneurship. I was 100% ignorant of the process. I thought I could ask for 100% of the funding I needed via a business loan on the merits of my business plan. However, it seems most banks expect at least a 4:1 debt:equity ratio. My consultants suggested supplying 30%. The bank I`m talking to currently mentioned 25%. The SBA said no bank will work with less than 20%. I thought the idea was crushed. I`ve never owned the sort of money they want me to have before I start the business, and if I did, I`d probably be happy with my job - a nice catch 22.
However,  I think I found a solution, but I`d like to get some feedback on it. I was told I can use a loan to provide the equity for a business loan. Here`s my plan: I have two friends going in on this with me. They`re essentially partners even though the company will be mine. All three of us want to improve our careers by getting in on a good thing from day one. Anyway,  my two friends would each, with separate cosigners, find out what the bank would approve them for, in terms of personal loans. They wouldn`t take the loan yet, though. I`d talk to my bank again, where I`m using my perfect credit to help me get the main loan, and work out the best terms for a loan, with minimal equity. 25% is the high end, but I`m sure it`s negotiable. Before taking any loans, I`ll save the remainder with my current job. So let`s say between my two friends, I can get 13,000, and the bank says they won`t talk without 25% on the table, I could scrape up the remaining 12,000 in a year or less. Then they`d apply for their loans. If both loans got approved as planned, I`d take those loans as my equity to ask for the big one. If one of the loans failed, the successful loans would just be repaid early with the savings paying back the interest. Worst case scenario is one of my friends gets a credit score boost.Has anyone else used a loan for equity? Any suggestions for funding a company without investors would also be appreciated. I looked into angel investors, but I`m very proud and I want this company to be mine. I don`t want to be beholden to investors, and I don`t want shared ownership. Thanks for your time, and nice to meet you all.

MattTurpin

At this point, I wish I owned a home. It`d make getting the loan that I need much easier. However, living with my parents does offer one advantage. Craig was telling me in my other thread that one of the reasons many small businesses fail in the first year is because the owner needs to balance two sets of bills: his own and the company`s. For all intents and purposes, I only have to balance one. Any safety net I can muster will be in addition to my actual salary, which, until the company stabilizes, can be largely thrown back into the company as needed.
Can I start the business on a smaller scale? Actually, that`s something I`ve been looking into. I have some core requirements I have to meet so that my two partners who do have to make ends meet can survive the rocky start. However, a lot of my budget can be reduced. I can start with a smaller building. That`ll lower my rent, utilities and furniture. After all, simply owning a drive-through will add an estimated 30% to my bottom line in profit. I can make sacrifices on the interior if necessary.I sent an email to my consultants last night. It was in reference to financing, and all of the juggling I`m doing. I was curious why the advice in the book I bought by their owner recommended saving 30k and asking for 70k. Both my father and Craig support the idea of a one year expense safety net. Their reply was that the espresso industry recommends 1/3 the startup cost as a safety net. So, I was happy that my plan of doubling the startup cost as a compromise was more than likely adequate, given that I needn`t support myself for the first year with my parents happy to keep me around till the cafe makes enough to get my own place.I am worried that the business won`t take off as expected, though I can only think optimistically. Still, if their two personal loans take the same format as the personal loan I took to help establish a credit rating (didn`t know I had an extensive one already, but it didn`t hurt) and get my new laptop, then I can afford to repay those two side loans out of pocket. This is probably the best chance for me to safely start a new company, as I have so little to lose. I only pray that the SBA really will insure loans up to 150k like they claim. Heck, if they cover 100k I can make this work. I need a bank that will work with a person who has top notch, excellent credit, but no collateral. I won`t risk someone else`s house for this.Thanks for the suggestions - that you suggested an idea that I was considering myself is a confidence booster for sure. It means people who know what they`re doing are having similar ideas to my own, and I might have a shot at this. When I joined this forum, I half expected to discover I was wildly off base and unrealistic. It`s reassuring. Thanks for the reply. This is a totally new ballgame for me. Never done anything like it.

robertj

Matt,
 
Gathering capital from other sources (friends and supporters) to meet the requirements for a loan is not new.  You should be clear as to the "agreement" you have with these folks.
 
You may need to go to a source other than a bank these days.
 
I am glad to hear you say that getting an advisor/consultant was good for you.
 
Let me know if you want to discuss the details of your specific situation.
 

MattTurpin

...Having said this, your strategy to come up with the required down payment by taking out additional loans is actually quite common, but also dangerous because it will leverage your business quite a bit. The first couple of years, your business will be linked to your personal credit history and if all of you show significant debt, this will curb your ability to fund day-to-day operations and/or further growth based on credit. Another route you and/or your consultants may want to explore is a loan or loan guarantee by the Small Business Administration (SBA). Working with them is a pain (as with most government agencies), but it may be worth it as they have a number of loan and loan guarantee programs tailored to small business owners...

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Something didn`t work with the quote, so my comments start here.Thanks for the advice. I`m looking at every alternative to using loans to supply equity. The essential problem I think is a mixture of impatience and necessity. I need to improve my career, and if you want something done right, you have to do it yourself. I can save 1,000 a month, but I would like to do this in under three years. I originally hoped to be up and running in 6-8 months. I think a year is what will actually pan out.If I have one asset going into this, and being the frontman of the business - the owner - it`s my credit. I have zero complaints and a score of 726, in the "Excellent" bracket - top tier - according to Experian. I only recently checked for the first time. I knew I had no faults against me, because I feared using credit of any kind, lest I fall in a hole of debt. I found out I had about 8-10 good transactions listed, and a score to be proud of. You say bad personal credit can hinder the initial stages of a business. I pray the opposite is true. If bad credit can penalize, excellent credit had better reward proportionately. I doubt that`s the case. It seems when you have good credit, only your yearly income matters. If you have good income and bad credit, only your credit matters. Things only serve to disqualify you. But, I remain optimistic.The SBA is one of the foundations of my plan to succeed. I`m not a home owner. I have no collateral. I`m honest with good credit, and that`s about it. The SBA claims to insure bank loans up to I believe 150,000, with expedited forms for loans 100,000 or less. I pray that this will help me overcome my lack of collateral. I have the strongest optimism for the success of my cafe plan. That said, I`m not perfect, and I refuse to wager the house of a friend or family member to do this. Unless I marry and get joint income of some sort, my current wages will never afford me a house worthy of collateral.I`ve been looking harder at the idea of investors. I refuse to have another person with permanent part ownership of the cafe. I want to be able to say I own this business. However, some investors only look for a return on their investment and then allow themselves to be bought out. I don`t want a board of investors who can fire me. I`m more the dictator type than the democratic type. I`d prefer an SBA loan, but if an investor can offer the right terms, and agree to step aside after getting his/her fair share, that`s not something I`d oppose.MattTurpin2/21/2009 1:02 AM

MattTurpin

If I had acted on my ideas, I`d agree that I`m not planning. On the contrary, all I`ve done for several months now is plan. My threads here are simply part of that planning process. I want to find the best balance of safety and haste. My biggest problem in life is actually that I never progress beyond planning. This business is an exercise in action. This is the one big goal I`m going to do. But, being reckless will get me nowhere. I feel like my current job is a ticking time bomb towards layoff. The current economy offers little hope of quick reemployment. While I want to proceed wisely, and I will, in starting my own business, I need to act quickly.
Thanks especially for the mention of 3-6 months of first year expenses. So far, I`ve gotten 1 year, 1/3 my startup cost, and now 3-6 months, in terms of proposed safety nets. Here`s my proposed safety net. My business will cost just under 100k to start. My monthly expenses, on the assumption of 3,000 a month loan repayments, will never exceed 30,000. I`m going to get 200,000 by one way or another. The extra 100,000 will be my base safety net. That`s three and a half months on the assumption that I don`t get a single customer at all. I`m not expecting to make the next Starbucks, but I think I can make that 100k last me 6 months to a year. Business won`t be that bad for a cafe near a university. A further addition to my safety net is my own salary. My expenses in real life are minimal, and my salary according to the budget provided by the consultants, is bigger than I`ve ever seen. I lowered it by 5k, and can lower it a further 5k if need be. This cafe is more important than me. If I`m not in the 10% of businesses that don`t fail, I`m not going to take it lightly. This is my mark on life. I`m going to give it every precaution for success that I can muster.