Two entrepreneurs (a husband and wife team) came to see me this week. Their dream is to expand their personal training business that they’ve had for a couple of years, and they’re looking for a way to finance it. They’ve been negotiating tenant improvements with a landlord, they have a business plan, and now all they need is the money.
The stakes at the meeting were high. The husband (the dreamer) will break through any walls to grow his business. The wife (more cautious) seemed to want to support her husband but was more pragmatic. They were accompanied by their commercial real estate agent, who would like to find any way to get the job done.
This couple is typical of many entrepreneurs today. They have no equity left in their house to use as collateral for a loan. They’re in a service business that does not have any tangible assets that a bank can use as collateral. And they’ve running their business and personal expenses out of one checking account, making it more difficult to sort out their profitability (shame on their accountant). They’ve also been banging their heads against the wall with banks for months. And in the process, they got tricked by an “equipment leasing credit card” that charged them $4,000 cash a few months ago so they have the “right” for them to borrow money from him in the future for their equipment at about thirty percent interest.
We spent about half an hour sorting through their options. I explained to them that while they might be able to cut and paste together an assortment of high interest “unsecured loans” like their equipment one and other merchant cash loans, in doing so they were putting their entire existing business at risk, and they needed to know that everything they had spent the last few years building up risked being destroyed. And I explained to them that it’s highly unlikely that any traditional lender will approve their loan.
We came up with one possible solution. The wife’s dad has several pieces of property that he owns free and clear. If they asked him to put one of them up as collateral, and he was willing, I think this couple could get a lender to offer them an SBA loan. Under this plan, the interest and principle payments will be reasonable, and I think they can well afford to manage their growth.
I am not sure that anybody left the meeting happy. I didn’t have a magic bullet to offer the real estate agent to close his deal. And the couple has some hard and tough decisions to make about what they want to do.
This story is similar to millions of stories of small business owners and entrepreneurs in America today. In this case, the landlord would like a tenant for his space. The real estate agent wants his commission. The equipment manufacturer would like to sell them new equipment. The equipment lessor would like to earn his high interest rates. The sign manufacturer hopes that they move into their new building so he can make new signs. The merchant cash advance lenders would love to get their claws into this company.
All that being said, this couple has a mortgage to pay and two kids to put through college. They need to grow their business in a prudent fashion. I am not sure if I will ever hear from them again, but I sleep well at night knowing that we gave them sound advice.