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Getting a business/commercial loan

Getting a business/commercial loan

Did a few searches on this subforum and was a bit surprised to see there hasn't been a thread about how to secure a business loan.

I'm looking into the possibilities of starting a small business which will be a franchise restaurant. No, it's not one of the big one of the big ones like Burger King. Rather, it's a smaller franchise that I think has potential to grow. A good friend of mine owns one of them already so he's going to be my guide while I'm walking down this path.

I'm looking to get a business loan to get started up and I'm wondering if anyone here has been through a similar process.

Some of the factors that will affect whether I will be able to get a loan or not:

- I've never owned a business before so that means I can't use experience as a selling point nor can I put a business up as collateral
- I don't own a house so no collateral there either
- I don't have a big stash of cash ready on hand. If I was truly desperate, I have retirement accounts and stocks I could liquidate but I would prefer not to do so

- I have a pretty good personal credit score (above 750)
- I have a steady job that gets me an above average salary which I plan to keep working at while I start my business up.

With all of these factors, what are some of the best paths I can take to secure funding? I'm looking into SBA loans but I've heard those are difficult to acquire. I'm also going to start tapping people in my personal network to see if I can raise small loans from each of these people so that I can use that as liquidity to show banks and other potential loaners that I already have a decent amount of cash on hand. Any other things I should be working at?

Getting a business/commercial loan

My advice would be to be very careful with taking loans. When I had my business, I took a modest loan, that was government backed with a very low interest rate - designed almost as a giveaway to small businesses. Fortunately I was able to discharge it without incurring any fees, so when I wound up my business I didn’t have too many problems. But I had it for about 8 months, making repayments on it, and spending the capital at the same time on the business.

Those repayments come around so quickly you wouldn’t believe. Even with a loan as favourable as mine was, one that is not widely available, it was a mixed blessing. The thing with running a business is that there is always more money to be spent, always something ‘critical’ it can go on. My personal advice, if you are only dabbling in starting a business at the moment (and until you’re full time you’re dabbling), is that you should spend your own money, only what you can spare, and avoid taking on debt. Personally I feel I had the wrong advice, and would not take the loan again. I took it because I was on a very selective government backed scheme for high growth ‘exciting’, businesses, and I had been provided with mentors from a couple of FTSE100 companies, retired senior execs, who were counselling me to take the money as I had ‘such an exciting business’.

I felt it was bad advice at the time, but it was all new ground to me and here were these big shot guys telling me to do it. The thing is, they had never built a business, only run preexisting ones. Placed in the same situation again, with a bit more experience now, I would refuse that council. The amount a loan provider will offer you, particularly when it’s just an idea, will not be enough. If they do offer you enough money, then it will come at an unacceptable price. Debt-based financing, unless it is convertible to equity for the loan provider in case of default, is a very bad idea for small business in my view. Most start ups fail and you have to ask whether you are prepared to still be meeting that debt obligation personally years after the business fails.

Getting a business/commercial loan

Before I give advice I will let you know my qualifications. I have a BBA and have successfully started and run one tiny company. I am now helping run one small one.

Interest rates are projected to rise and commercial loans already have high interest rates. So that’s risky in itself.

Also for any restaurant the rule is you won’t make money for the first two years and there’s a 80% chance you’ll never be profitable. The restaurant business is very tough. If your friend isn’t telling you this then be very careful about trusting him.

The reason most people sign franchise agreements is because HQ provides a ton of support which they can afford based on economies of scale.

Before starting I’d suggest you make up your menu, cook the dishes yourself, and see if people would be willing to pay for them. Cater your office and see your response. Remember that ingredient costs for dishes should be about 20% of the price.
I’d strongly suggest you go the food truck route. This helps keep salary down, avoids having to pay property tax or rent, and provided a great way to test your concept out.

In summary I’m not going to tell you no. But I will tell you this is extremely risky.

Getting a business/commercial loan

Don't know what the American market is like but in Australia banks wont lend more than 70% to buy a franchise and that's for the gold standard of franchises (think McDonalds), for most franchises you'll be lucky to get more than 20-30% of the purchase price. Even less for a new franchise with no established trading records and financials for them to base the loan upon. It might be very different in the US where it's still the wild west of lending but I'd imagine you'll be copping an extortionate interest rate to borrow on a relatively unknown franchise startup.

Also worth noting that most banks are going to look down on your employment and that you will be ongoing, basically will take it as a sign you're already thinking about failing and that you will be an absentee owner. Again, might be different in the US but in Australia they'd treat that as a con not a pro.

Good luck though either way!

Getting a business/commercial loan

There might be government programs to help guarantee the loans. It was a long time ago for me (25 years) but I got $15k that way. Contact your local chamber of commerce or government office to find out what is available.

But as a cautionary note, if I was going to start a business to make real money, I would be a franchisor rather than a franchisee.

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