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Q: Small Business Finance ( Answered 5 out of 5 stars,   0 Comments )
Subject: Small Business Finance
Category: Business and Money > Finance
Asked by: sofamngr-ga
List Price: $200.00
Posted: 07 Aug 2002 00:25 PDT
Expires: 06 Sep 2002 00:25 PDT
Question ID: 51632
I am looking for a Secured Business Loan (Real Estate/Inventory)
between 300-500k.  SBA or Conventional.   Current business has existed
5 years with increased comp sales year over year of +20%.   This years
revenue is projected around 2.8 million.   Retail furniture.  
Problem:  Asset/Liability Ratio is poor, company has a Gov't lien for
33k.  Payables currently 30-60 days past due.   Original SBA loan was
not sufficient to cover operating losses for the 1st year.   Leveraged
payables and used credit cards (cash advances) to cover cash losses. 
I have been asked to review this company's situation and assist them
in getting out from under this problem.   Conservative forecasts that
I have done show that this company would be cash flow positive over
the next 6-12 months.  Sales Per SQFT and GMROI are well above
industry standards.   Would like information on Institutional interest
with this type of situation, as well as additional direction on
preparing the company for bank approval.

Request for Question Clarification by seedy-ga on 09 Aug 2002 02:28 PDT
If the asset/liability ratio is poor, where are you getting the
inventory/real estate value to put up for security??  Also, what
profit margin % (GM & net" on the business??  Can you afford to factor
the receivables for immediate cash??  "GM and ROI are well above
industry standards"....Where has difficulty come from?? ie: expansion,
start up costs (but is five years), investement in inventory...etc.
What is inventory turn over ratio??


Clarification of Question by sofamngr-ga on 09 Aug 2002 12:12 PDT
Getting all the info from the company - will clarify before 8pm Pacific
Thank You

Clarification of Question by sofamngr-ga on 09 Aug 2002 16:38 PDT
Here are the #'s compared to the industry avgs. (NHFA - National Home
Furnishings Association)

Description                  Our Store        NHFA Industry Avg. #'s
Sales $'s per sq. ft.          $270.95                $129
GM%                              41%                   43%
Inventory on hand             $259,000               $706,572
GMROI                           $4.17                  $2.13
Turn Rate                       6.25/yr                2.90/yr

As you can see the company has kept it's inventory levels very low while
maintaining very high dollars per foot.  This is a special order business,
so additional inventory is a liablity.

Real Estate held by the owners of the business has equity in the range of
$200-$250k which is not part of their asset/liability ratio.  Using a factor
is not an option on the A/R, the company carries no A/R longer than 1-2
days.  When the merchandise is delivered the funds are collected.
Difficulty came from Internet boom, company attempted to get funds from VC
in 2000-2001 before the crash and lost approximately $300k in the attempt.
They also had insufficient sales from year one to cover operations, the
deficit ran into the subsequent years and the company has been slowly
retiring the debt.  We are looking for some capitol to consolodate high
interest loans as well as give the company some room to breathe, so they can
focus on business improvements instead of daily cash flow.

Here are the year by year #'s

Year End 6-30

Year                 Sales                Profit/Loss
98 (6 months)       $370,000               -$53,901
99                     $1,184,000              -$75,182
00                     $1,433,000             -$228,087*
01                     $2,088,327              -$10,668**
02                     $2,402,000              +$17,000***

* Includes Approx 150k in expenses from E Company.
* Includes Approx  85K in amortization/write off of E Company.
* Includes Approx  75K in write off of remaining E Company Start Up costs.

Clarification of Question by sofamngr-ga on 09 Aug 2002 19:59 PDT
When asking about institutional interest....looking for specific names
of banks that would be our best bet for approval.  Personal credit
history of owners is perfect (Not one late payment...all 1's). As you
can see not the same story with business, but overall not the worst
I've seen.

Request for Question Clarification by seedy-ga on 13 Aug 2002 22:00 PDT
Sorry for still asking for answer clarification, but this is not an
easy circumstance.

1.  It is difficult to get a "conventional" SBA loan because of the
following restrictions (not impossible, but difficult)...


            * to finance floor plan needs;

            * to purchase real estate where the participant has issued
a forward commitment to the builder/developer, or where the real
estate will be held primarily for investment purposes;

            * to make payments to owners or pay delinquent withholding

            * to pay existing debt unless it can be shown that the
refinancing will benefit the small business and that the need to
refinance is not indicative of imprudent management. (Proceeds can
never be used to reduce the exposure of the participant in the loans
being refinanced.)"

2.  Is the real estate held in the business' name or a separate real
estate company??

3.  While a SBA 504 probably does not fit the situation, it should be

"Proceeds from 504 loans must be used for fixed asset projects such
as: purchasing land and improvements, including existing buildings,
grading, street improvements, utilities, parking lots and landscaping;
construction of new facilities, or modernizing, renovating or
converting existing facilities; or purchasing long-term machinery and

The 504 Program cannot be used for working capital or inventory,
consolidating or repaying debt, or refinancing."

4.  Can you take out a second mortgage or equity loan on the real
estate equity although that seems to be too small to completely wipe
out debt, it could ease the situation??

5.  What equity do owners have in other real estate or does the net
value shown represent their homes as well as the business?

6.   The websites below are business loan houses:   78,000 sources for business

7.   You may wish to seek loans from other local business owners on
the basis of payment of interest for five years with a balloon payment
on the principle after the loan period.  The business appears to be
relatively successful with owners who have a good credit history.  The
doctor, the dentist, the funeral director, the automotive agency
etc.....This is a small town approach that is frequently used to get
over short term cash flow problems and reduce debt interest.  I once
bought a company which had 91 investors, from the local widow lady to
the funeral home (which had the largest interest other than the

I hope some of the ideas are original but will await your next
clarification prior to attempting to post a final answer.


PS:  What area of the country are you in....or state.

Clarification of Question by sofamngr-ga on 14 Aug 2002 18:50 PDT
I appreciate your interest in this situation. My background is in
accounting and have had little experience with obtaining financing, I
am currently organizing their accounting procedures and cleaning their

Here are some answers to your questions and additional
questions/comments regarding the company. I apologize if the answer is
lengthy, I would like to give you all the available information.

Today the company obtained an equity investment of $100,000 from a
close family friend.  They have been expecting this to go through to
aid them in cleaning up some of their liabilities prior to presenting
a plan to the bank.  My question goes back to my original post
"additional direction on preparing the company for bank approval" 
What would be the best use of these funds in the bank's eyes-

* Releasing the federal liens - 33K
* Paying down some of the C/C debt
* Getting the vendors back to terms
* Keeping the funds as cash reserves

In spending more time with the management, I have found that they have
been planning on opening a second location and would like to obtain a
loan that would fund the expansion as well as consolidate the
obligations of the current location.

Question #1

I believe they can make a case for the sba requirement

* to pay existing debt unless it can be shown that the
refinancing will benefit the small business and that the need to
refinance is not indicative of imprudent management. (Proceeds can
never be used to reduce the exposure of the participant in the loans
being refinanced.)"

By consolidating the credit card debt they would add $5000-$6000 a
month back into the cash flow and reduce their yearly interest expense
by $25,000-$30,000. Am I off the mark? Would they consider this
situation imprudent management?

What about paying off the remaining $130,000 on the SBA (7a), it's at
a great rate but I believe they need to roll it into the new loan
because of it's ties to the inventory/real estate.

Question #2

The real estate equity ($287,000 - Just got appraisals done on both
homes)is held personally by the two owners (their homes) and is tied
to the business through a UCC lien from the original SBA.

Question #3

SBA (504) Can we use this in our situation?  Opening the second store
- They have learned from past mistakes and as you can see will have a
profitable business if we can get some of these liabilities in order. 
They have excellent business practices in the store and have recently
gotten their accounting practices in line. They have a very strong
business plan for the new loan and hit their original sales
projections at 96% - UNBELIEVABLE but true.

We would like your thoughts on how the bank would view the second
store - should we be looking at buying the land or just getting funds
to buy inventory/TI's and lease the building?

Question #4

2nd on real estate not possible due to the SBA/UCC Lien on the home.
Am I right on this?

Question #5

Net value is already represented

Love the links - Haven't fully investigated, but looks like incredible
source of information.

Question #7

Owners don't currently have these kind of contacts in the community. 
I believe this would be very difficult in this situation.

Located in Northern California

Our current thinking is that a local community bank may be our best
shot.  In your opinion, do you believe we should pursue the internet
sources for funding or local banks?

Last few clarifications

* You have touched on the different types of loans that are available.
 What loan would give us the best chance for approval in this
particular situation? The amount we're looking for with a second store
(Leasing not buying) would be $700k

* In your opinion, what would be the best course of action - Trying
for a larger loan secured by the new location's real estate/building,
would this appear more secured/lucrative to the bank? The building
they would lease would run $22,000/month.

Thanks Seedy......pleased with what I've seen so far

Clarification of Question by sofamngr-ga on 18 Aug 2002 22:22 PDT
     After a few days with no response I feel that I may need to
clarify my expectations.  What I really would like is your
opinion/suggestions regarding this scenario.   I realize that there
are many correct answers to these questions - but what I'm looking for
is your recommendations.   Your responses have been spot on and I'd
like to wrap this up and get you paid.


Request for Question Clarification by seedy-ga on 22 Aug 2002 03:31 PDT
Sorry about unresonsiveness....I'll work on clarifications
tonight...have been distracted by some illness and a visit by my
daughter, her husband, and our wonderful 7 year old grandson who have
traveled from CA to see me.....seedy

Clarification of Question by sofamngr-ga on 22 Aug 2002 11:03 PDT
No problem....Hope everyone is feeling better. Put the comment because
I thought we might be asking too much. Glad to hear you're still
interested in helping us. Looking forward to your answer.
Subject: Re: Small Business Finance
Answered By: seedy-ga on 23 Aug 2002 07:20 PDT
Rated:5 out of 5 stars
Today the company obtained an equity investment of $100,000 from a
close family friend.  They have been expecting this to go through to
aid them in cleaning up some of their liabilities prior to presenting
a plan to the bank.  My question goes back to my original post
"additional direction on preparing the company for bank approval" 
What would be the best use of these funds in the bank's eyes-
By consolidating the credit card debt they would add $5000-$6000 a
month back into the cash flow and reduce their yearly interest expense
by $25,000-$30,000. Am I off the mark? Would they consider this
situation imprudent management?

A.  This is terrific news.   To answer this question, you have to
consider what are the terms of the Federal lien....Are they in first
position?? If so, pay it down.  The bank is not going to want to be in
any position but first position....If the Federal lien is not first
position (hard to imagine), pay the highest interest debt down as much
as you can. I'd imagine it is the credit card debt.  Improve your cash
flow as much as you can while keeping the first position open as much
as you can. Is the Federal lien the equity back up for the SBA loan??

B.  Get some contacts in the community.....C of C, Rotary, etc....very
important to the future success of this business.

C.  Roll the SBA into the expansion plans.  This is good debt.  

D. Develop a good business plan.

I answered a question at GA with the following information about
business planning...This is a difficult stage for a small business. 
You must insist on a day to hash it all out and write it all down and
present it in the most compact form you can develop.

quoted from question
There is a saying about your business plan, (paraphrased) If you can't
clearly describe your business plan while riding down on an elevator
from the 10th floor to the ground, you haven't got a plan...Your quest
for a simple and direct plan is admirable.  Of course there are
several pieces of software out there which can assist you (for a fee).
 Some of these are listed below.  I'll also give a personal opinion as
to format from my experience.
The following link gives you examples of business plan outlines and
sample language. The software package costs $99.95.  (don't buy yet) 
also a mini plan free example: 
The following ink gives you examples of business plan outlines in
freeware form: 
Bulletproof planning offers a free demo template trying to sell you
their software:
A British accent (very classy) is offered by Royal Bank (for free): 
A fair amount of information about business planning for free is
offered at: 
The search strategy for the information provided above was a google
search using the search terms:   "business plan"+examples
My personal experience would suggest the following: 
1.  Write an executive summary first. (one page max)  This is the most
difficult part of the plan.  It should contain a clear description of
the product or service from a benefit standpoint to the customer
(don't just talk about features), why this business is distinct from
competition, what you are asking for, and what is the return on
investment (when??).  The last line should clearly ask for the order
(what do you want and when) Remember the old feature/benefit model.
Features are things that are inherent in the product/service; benefits
are what they can do for the customer. My contention is that there are
only two universal benefits which are value and peace of mind. You may
wish to make a short statement of your exit strategy in this
summary...but it is most important to be clear and brief.
2.   The following pages should expand on the summary...Development
plans, phased, costing,etc then Marketing plans, phased, costing, etc,
Financial projections phased, Capital requirements, cash flow
analysis...all the good things about money. Charts and flow diagrams
demonstrate the axiom that a picture is worth a thousand words.
3.    Be clear in what you are asking for.... 
4.    If your plan depends on your "team", be sure to give a detailed
bio of each person with examples of their commitment.
5.    If you can summarize your plan into a slogan/mission statement
(don't spend a lot of time here unless it jumps out at you...the
mission statement thing is a bit passe)  ie: Honda's supposed
statement was "Six Honda's in Every Garage"  Most of them are drivel.
I hope this information is what you were looking for. If not, I'll be
glad to provide clarification to satisfy your requirements.

E.  The second store is quite a stretch.  There is not much equity to
go around to I would imagine the lease arrangement is all that is
open.  It seems to me that you are six to eight months from the new
store in terms of getting your debt/equity in shape.  The market is
now....and the competitive advantage is now.  You need about another
$150K in equity to make it a lay down.  Another investor??  How much
equity did the owners give up for the $100K.

F.  Start with a large bank.  You can then come down to a regional
bank.  And then come down to a community bank.  Generally a large bank
will not talk with you except to give you some advice and review your
business plan.  Use them that way.

I am posting this information as an "answer" BUT....hope we can
continue the dialogue until you are satisfied.  If I never satisfy you
fully, you can ask for a refund.

Interesting opportunity.


Request for Answer Clarification by sofamngr-ga on 23 Aug 2002 16:32 PDT

Thanks for the answer. You have spent a lot of time on this and I
appreciate it.  I will give you a 5 star rating and pay the $200.  I
would still like to see if you can help us with the following:

	What loan type (SBA, Conventional, 504, 7a, etc.) would you think
best fits this situation.
	Can you give us a list of lenders in our area that would be our best
	Any suggestions on refinancing the credit card (high interest debt)?
 If we can’t pay it off, do you think a bank will allow us to roll it
into a new loan?
	The SBA - You said this is good debt (We agree) - Our belief was
that the bank would not give us a new loan when the original SBA is in
1st position.  That is why we thought it would have to be retired with
the new funding.  Is this correct?

Answers to your questions:

The lien is in first position and will be paid off first.  It is on
the equity back up for the SBA loan.

If it is easier to find websites with the info - we will be glad to
spend the time researching the sites.  Again, I thank you for all of
your help.  This is a great service and you researchers do a hell of a

Clarification of Answer by seedy-ga on 25 Aug 2002 21:07 PDT

Your request for clarification comprises two major areas:
1.   Lenders in your area..
  You may wish to examine the following URL for some preliminary

In case that URL gets cut off, you can click on this shorlified

A list of cities with banking suggestions can be found at:

Shorlified into:

It is difficult for me to rate these institutions since I live in
NH/MA and rarely have reason to deal with CA banks.  When you have
your package together, you may want to network with other business
people in your area (that's why contacts in the community are

2.  Roll credit card debt into bank loan plus SBA loan structure:
You know the old saying, '...a bank will only loan you money when you
don't need it..'  How you craft the business plan, balance sheet,
asset list, is very important along with the performance history.  You
will need to shop this information (time consuming and expensive) in
order to find the bank and the rate you need.  You also asked about
SBA loan structure.

You may need more informed council than I can give to your specific
circumstance...Here are some URL's that can help:

Mainly, I would suggest you council with some individuals from SCORE

I hope this information helps.  I'll be out of touch for a couple of
days but will respond to any additional information requests on
Wednesday/Thursday when I settle in Hawaii for a short period.  Good
sofamngr-ga rated this answer:5 out of 5 stars
Great work by seedy - Offered to continue helping after the question
was answered.  Tremendous asset to Google Answers. Thank You!

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