Business Loan to buy pre-existing loan

crystal118

Hello, my name is Crystal & this is my second post on this forum.  I am very interested in opening my own resale/consignment shop.  I want to specialize in mommy & children clothes because I am a mommy of 3, lol & it`s a great market.  
There is a children`s resale shop in a near by town that I am interested in buying.  I have spoken with the owner before about opening my own business & she was very helpful & nice.  She is now selling due to health issues.  The place she is leasing is small, maybe 500 square feet, & I`m guessing.  That includes storage area & bathroom.  She ultizes the sidewalk in front of her shop to place larger toys like bikes & slides, etc.  She told me her monthly rent is $400 a month & with everything else she has, her overhead is $800 a month.  She claims to bring in somewhere around $4,000 to $5,000 a month.  I have an appointment with her for Monday to look over her tax information she files every month.  She also claims she has enough inventory to do the store over at least two more times in storage.  She is asking $28,000.
 
Now that I have all that out of the way, how do I get a business loan.  Hubby & I filed bankrupticy in 2004 & I haven`t done anything with my credit since then.  I have 3 small children so I stayed at home with them & he worked until recently.  We are now seperated, but I hope to work things out with him.  I have prayed to God about this & even have a friend that wants to be partners, but she is in a similar situation & can`t help with capitol, not at this time.  Don`t worry, I am going to talk to a lawyer for both hubby & partner.
 
Anyways, my father has his parents house that is tax valued at $85,000.  My grandparents are both deceased & the house is empty.  Hubby, kids & myself were living there until split up.  It`s not a big house, but a nice one.  The house is in my dad`s name.  My dad can`t help me because him & my mother both lost their jobs for almost a year so he ended up spending his savings on living expenses & now is trying to catch up on bills.  I was wondering if I could use the house has collateral for a loan because of my credit issues.  Maybe borrow $50,000, (after making sure I agree with her asking price).  Pay her $28,000, use $2,000 for any new expenses (she doesn`t do advertising) & use the remaining $20,000 to start paying the loan back until I can get in the swing of things. 
 
These are just my thougths, let me know what you guys think, thanks, Crystal. 

robertj

Crystal,
If you get a 50,000 loan for 5 years at 9% - your monthly payment would be $1037.92. 
The seller says she brings in $4000 - $5000 per month. Is this Revenue or Gross Profit? If it`s revenue then it will be reduced by the Cost of Goods Sold.
Even if this represents a gross profit amount, with the rent, overhead and loan payments, there isn`t much left to pay you and any one else involved (like your partner).
I`d suggest developing a plan that includes the basic $ projections as well as a plan for "rapidly" increasing the revenue. robertj2007-12-2 13:4:0

crystal118

Ok, I learning so bare with me.  Revenue is all the money a business takes in & gross profit is the money the business makes, but less the over head and other expenses.  Something like that?  I`m not sure what the $4000 to $5000 is exactly.  I`m meeting with the owner today to go over her books so I will ask her.  Also, as for increasing revenue, I was going to do some advertising, especially since the lady doesn`t do any right now.  I was planning on doing some ads in the local papers.  I would like a web site as well, but baby steps.  I also belong to 2 local mommy clubs & can do a lot of advertising that way as well.  I would like to buy an inexpensive, but good, software so I can do my own business literature.  As for the partner, there is no pay for her right now.  I mean, she knows until she can buy into the business so to speak, she is just there to help & learn.  As for the payment, how did you get that figure??  I run my figures through a mortage calulator & even at 10 years, which I wouldn`t want a business loan for that long, for $50,0000, I couldn`t get your figure.  I think I`m doing something wrong, lol.  Anyways, any help or advice would be greatly appreciated, TIA. 

robertj

Crystal,
You are correct that Revenue is "all" the money the business takes in.
However, gross profit is the difference between the revenue and the cost of what produced the revenue. (called Cost of Goods Sold or COGS).
Gross profit is what is used to pay all the expenses such as rent, salaries, advertising, etc.
I just redid the loan calculation and came up with the same number.
And finally, it`s great that your "partner" will be working with out pay - but in the beginning, it looks like you will be receiving a very small compensation too. Are you prepared for that?robertj2007-12-3 14:32:58

crystal118

The name of the store is Mommy & Me so I will refer to it as MM.  I finally got a chance to talk with the owner of MM, Candy, & look over her tax papers.  The $4000 to $5000 a month is revenue.  She has been open for 5 months & has made right around $16,000.  I spoke with her about the price of the business & she said the least she would take is $25,000.  I`m very excited about this opportunity.  There is a baby resale store up the street & a baby consignment store, down the street.  The resale store up the street; the owner lives 30 minutes away & is thinking of closing her store & moving to her town to save on gas.  The consignment store down the street; the owner is going to nursing school & is unsure if she is going to continue after she finishes her schooling which means the store I am looking to buy will be the only one in the area.  Also, the one way street MM is on has 20 to 25 thousand cars a day to travel it.  
I spoke with the director of the local SBA to see if they could point me in the right direction & she pretty much shot my planes out of the sky.  Anyways, there isn`t any way for them to assist me or direct me.
 
Also, I don`t have to  borrow $50,000.  That was just a figure I came up with.  $30,000 would be better & less to pay back.  It would still allow me to do what I need to do.  Thanks. 

robertj

Crystal118,
I can tell that you are anxious to "do this".
Did the seller give you any indication as to how she arrived at the price?
       Does the purchase price include any inventory?
 

crystal118

Well, I asked her how she came up with the price she was asking for the business.  Her response was that she never got a loan or help & that all the money was out of her pocket.  She also said she had never really paid herself, as far as drawing a pay check.
Yes, the store comes with inventory.  I haven`t seen it yet, but she claims she has enough inventory to re-stock the store twice over.  She even has some spring & summer stuff.
 

robertj

I think it is important to get a handle on the inventory starting with:
 
How much of the "price" is for the inventory?
 
Then - How much is the inventory worth - is sales dollars?
 
While I "appreciate" her situation - her "reasons" for the price are not directly relevant. They may be reasons she wants to sell - especially the one about not paying herself.
 
You need to be sure that you can (pay yourself).
 

crystal118

Well, my dad tried getting an equity loan for his late parents property.  Because he was unemployed for a year, they said no.  No money is owed on this house so it would have been a sure thing or at least it should have been. 
 
I talked to the owner & explained what was going on.  She really wants me to get this business.  She lowered her price to $20,000 to help us out.
 
There is another lady looking to buy the business, but she is a grandmother & her primary is her grandchildren, who live out of town.  Candy, the owner, is somewhat concerned that the buisness will not do well if this other lady gets it because she is focused on her grandchildren. 
 
I`ve prayed about this & really felted this was meant to be.  I know some people would say God has no place in business, but I don`t think like that.
 
Anyways, I just wanted to update you.  You have tried to help & I appreciate, thanks.

crystal118

If you were me, how would you go about doing this?  I mean, buying or opening your own resale shop & growing it??