Buy building to use for collateral?

[Vertigo]

Has anybody here ever bought a shop to use as collateral to help secure a business loan? I'm getting desperate!

[Jay H]

I don't think debt on a building is collateral, its a liability. Unless you are going to just buy it outright which makes me wonder why you would need a loan in the first place.

Just a though.

Carry on.

[Jeff Rodier]

Stuart,

I have spent ten years in mortgage lending and might be able to answer specific questions. I have also worked on numerous business loans. Give me a little more detail and a solution to your problem might be uncovered.

Jeff

[Vertigo]

I don't have any collateral for a businesas loan and I am trying to figure out how to get started. I need a place to sell and frame art. The only alternative is to frame at home and sell from my mimi-van at Hardee's parking lot.

[JbNormandog]

Stuart,

I had a hard time with the business loan route.

You mentioned a home... have you thought about a home equity loan.

I did it and my rate is much lower than a conventional loan and I didn't have to jump through hoops for a bank or the small business association.

On paper the business isn't carrying that much debt so now the banks literally visit me every 3 weeks to offer me loans and lines of credit.

Just a thought. Good luck.

[Pat Murphey]

And what happens when your start-up business plan fails and you can't make payments on your "business" home equity loan? This is only a good idea for a family with guaranteed income from another source (job). Those "pre-approved" loan offers dry up quickly when the usually required "personal guarantee" is investigated during the application process.

Pat :D

[Cliff Wilson]

Do you have a 401K or other savings that can be rolled over?

I created a C-corp, then had the corporation start a 401k qualified Profit Sharing Plan and Trust. Then, the corporation hired me. Then, I rolled some of my 401k money into the qulified plan which I was the trustee of. Then the corporation issued stock. Then, the plan bought stock in the corporation. --- voila, funded; with pre-tax dollars!

I used a company called Benetrends. A couple of accountants and a couple of local lawyers couldn't figure it out, but check out the web site benetrends.com for more detail. It's legit.

[Paul N]

Wow Cliff, impressive!

All you need now is send your profits off-shore....maybe to your head-office in Bermuda... graemlins/thumbsup.gif

PS: Setting up something like this is not cheap, or is it?? What kind of costs are we talking about?

[J Phipps TN]

Vertigo,

You would be suprised at how many business were started by credit cards. It is not what I recomend but when starting a business, banks are not earger to take the risk with you considering 80% of all new business's fail in the first year.

With that said, some people will start with lower interest creidit cards and when the busines is up and running, they will then (after a year or so) go to the bank with a little history in business. The banks are alot more receptive to someone willing to put their own credit on the line first and a business that has a good start .

Before doing that, Check with your local SBA. They have more information on Micro Loans throught the state for start up business.

This is only if you don't want to put your own home on the line.

Also if you are thinking of buying a building for collaterol, what will you use for a down payment? Comercial buildings usually require more of a down payment then residential. My bank told me they will only loan up to 80%. It seems to me,as Jay said, if you have that much money, you don't need a loan.


graemlins/kaffeetrinker_2.gif
Jennifer

[JbNormandog]

Pat,

If you can't pay a lower rate equity loan what makes you think you will pay a higher interest business loan. (if they even aprove it)

Don't you think you would HAVE to put up your house as colateral for a business loan? (that's what my bank wanted)

The banks aren't going to give ANYTHING away for free. A business loan is expected to put up colateral and usually you still have to sign for it personally.

My equity payment is a fraction of what the projected bus. loan would have been.

I am lucky where as we do have 2 incomes. I don't know more details about this situation other than what was first posted but was offering another perspective that they might not have thought of.

Vertigo, can you give a bit more detail of your situation?

[Cliff Wilson]

Paul,

As I recall, it was about $4000 to get it all setup (not counting the incorporaton costs which I was going to do anyway) and about $850 "maintainance" per year.

I used 100k to capitalize the business and have a fully qualified plan in place. Think "less than 1%" cost per year.

[Paul N]

Quite reasonable costs Cliff!

[Pat Murphey]

The last place I would ever put my retirement fund is in stock in my own start-up business. After observing the Airline business during my previous life, I can assure you that it is never a good idea to depend on your employer or business to both fund and guarantee your retirement. There is nothing in my career with TWA that I am prouder of than as Chairman of our Retirement and Insurance Committee I helped stop the use of our funds to buy the company. United Airlines employees, however, lost ALL of the retirement funds that they invested in their "healthy" company.

And Norman, you did exactly the right thing with other income to protect your home.

Pat graemlins/kaffeetrinker_2.gif

[Vertigo]

I was thinking of an old "Historic Site" home to buy and live in, with an out building to fix up for my shop/gallery. Then use the "Historic" aspect to get breaks on the taxes and etc. I want to use my profits for my own gain and not for the lease if possible. I would like to be able to have enough land for civil war reenactors to set up displays and other attractions.

I do have a guaranteed home loan from the Veterans Administration and no other collateral to offer.

[Jeff Rodier]

Vertigo,
SBA loans require that the borrower put up 20% in cash. The funds can come from a variety of places but typically must be your own funds. SBA requires detailed business plans and require reasonable assurance that the borrower is able to service the debt load without the business income. It is much easier to buy an existing business with SBA than to start a new one. Existing businesse must be profitable over the prior 2 years (some exceptions). SBA also requires prior experience in the industry or prior profitable business ownership.

Doesn't sound like this is the case (I could be wrong).

Business loans from commercial lenders are almost as complicated. The fact is that in most cases you must show a large amount of assets to assure repayment of the loan. The lenders don't mind you using their money instead of your own as long as you have cash reserves or large amounts of equity.

As far as buying the building goes it is one of two circumstances. You either have a very large amount of liquid assets to pay in full or make a huge downpayment. Typical commercial lenders will not go beyond 70% loan to value (they say they do but for typical borrowers it won't happen). Now if you put 30% down on the purchase you still don't really have anything to offer as security. The 30% equity that you hold will be treated as nothing since the lender always works off of worst cases scenario. Worst case is that the business fails and the lender has to place a lien on a piece of property that in a distress sale most likely will sell at or below 70% of its value.

Now let's get to your case specifically. I need to know the following information.

Do you own a home?

If so what is the true value (be honest here because the lender will)?

How much do you owe on the mortgage?

What liquid assets do you have?

How much do you have in retirement accounts?

How much and what kind of industry experience do you have?

Start by providing this information so we can further examine your situation and any options that would be open to you.

[Jeff Rodier]

Vertigo,

You posted as I was typing the previous reply. A VA loan will allow for the purchase of a primary residence only. You could find a mixed use property that allows for residential and commercial use but here is the problem.

Once you buy this building/home you still have zero equity. The business has no capital. You have a mortgage payment and a new business that according to statistics will most likely fail. What income will be used to make the mortgage payment and buy materials for the business while you get it up and running?

Civil war reenactments will require very expensive insurance coverage. The business itself will require seperate insurance coverage in addition to your homeowners policy. At this point you need a couple thousand per month in net income to support the structure. Now determine how much is needed for you to live. Let's say you can live very inexpensively and only need about $1000/month for yourself.

My guess is that you will need to generate about $15,000/month in gross sales to pull this off.

I think that you would be surprised at how many owners with many years of experience in this industry are unable to hit this number.

I still would like to know your level of experience in picture framing. Also, have you ever owned your own business? Do the numbers I have mentioned above make any sense to you?

[Vertigo]

I do not own a home and I have about $8,000 for 401k and about $2,500 (retail) in inventory.
I am new to framing and not worth much in assets.
I believe need to concentrate on being a home-based framer and build a customer base from here to save enough money for getting a business loan the right way. I may even be able to create enough business to bypass getting a loan from what I have been reading on "The Grumble". I am starting a new career, since I lost my job, and I believe picture framing is it. I tried to keep my job while I developed my skills, but the ax came a little earlier than expected. I wanted to buy an older (historic) home and work from there. So I'm basically starting over in mid-life.
I really appreciate all the advice I am getting from "The Grumble", it has opened my eyes to a lot of things I have never considered before.

[Vertigo]

Thanks Jeff,
I was typing as you posted as well. I was not aware of the extra cost of insurance. **** shame!
Can't do a thing that doesn't cost more money. Well the gallery/frame shop has been my pipe dream for the last ten years while I was turning wrenches on aircraft. It kept me going. Like I said earlier I guess I will keep a low profile and work from home.
To answer your question about framing experience I have had two framing classes in the last two years and an ocassional frame for myself. I just oredered a Trial Membership to PPFA.
Internet sales of aviation art was pretty good until the Publishers decided they could do it as well. That is one reason I wanted to open a physical storefront. Turn a hobby into a living.

P.S. No-experience in running a real business.

Going to in-laws to help set-up for yard sale. Be back later to catch up!!

[Jeff Rodier]

Vertigo,

In order to obtain your loan in the future you should prepare from day one.

1. Hire an accountant to keep your books (in the beginning you should only need to meet briefly on a quarterly basis).

2. Report ALL business income.

3. Invest in professional grade used industry equipment (the equipment is not worth anything as collateral to the lender but shows the ability to build the business wisely).

4. Report and pay ALL taxes in a timely manner (this is an ability that very few new businesses posess).

5. Accumulate two profitable years and lenders will begin to talk with you seriously.

[DBecker]

Don't overlook the possibilities of using student loans.
They're the cheapest money you can borrow outside the Bank of Dad ;)

Lots of new business owners start out while still working elsewhere.
Rather than slaving away at something unrelated,
why not make it a part-time 'job' learning more about the Civil War and earning a history degree.

Living expenses (rent/mortgage, food, car) can be partially offset with student loans.
This will free-up other money to go towards the business.

Student loans won't provide one-stop-shopping, but are often overlooked in a 'debt portfolio'.
If your financial planner isn't up to speed, find another.


Dave 'NumberJunkie' Becker

[DTWDSM]

Ok, sorry to be a downer here but let's think about this...

Only 8K in a retirement plan (that should not be touched except in a dire emergency)

Only 2500 in Inventory, Retail. Real value if to be used as an asset...500 if lucky

No experience in running a real business

2 framing classes in 2 years and an "occasional" frame.

No collateral for a loan


Stuart, If this was your child would you tell them that they should start a business (that statistically should fail in the first couple years) in an industry that is closing more shops than they are opening each year? Or would you tell your child that maybe they should go to work for a successful company already in the industry so they can find out more about the industry?

You say that you are "midlife", not sure what that means but, I would get a job with an employer with a retirement plan with matching funds, save some money and buy a home for myself and build up some equity. If you really like framing, keep on doing it as a hobby and if you can make some money at it, even better.

As I said earlier, I don't want to be a downer here, but as Jay once said about me, I am a realist.

As for student loans to start a business, shouldn't that federal money go to young adults who want to improve themselves by furthering their education so they can become business people who help keep our great economy going?

Too much of a realist statement Jay???? smile.gif

[Tim Hayes.]

I agree with Tim and must add that you opened this thread by saying that you are desperate. As I read this thread the reality is that you are totally unprepared both financially and experientially to start or opeate a business - a formula for disaster. It seems that you are making decisions based on emotion not sound business sense.

[Jerry Ervin]

I agree with Tim and Tim.