What do start-ups have to do with the X-Files, spookiness and commercial lending? Start-up businesses always scare commercial lenders. I think I have said this before, but commercial lenders are not in the business of providing risk capital. A certain amount of risk has to be tolerated or no loans would ever be made. That risk, however, needs to remain as low as possible and still meet the institution’s lending goals. Making a loan to an existing business with a strong financial performance is a piece of cake. “Yes please and may I have some more” (for some reason I pictured myself saying this with a British schoolboy accent…oh well).
Start-ups are, well, “spooky.” They are inherently risky and everything revolves around assumptions, like those made in the business plan and financial projection (“extraordinary claims require extraordinary proof”). Lenders will read the business plan and review the projections to make sure it makes sense. They consider the “5 C’s of Credit (also trying to correlate this to future performance). The 5 C’s are the borrower’s credit, character, capacity to repay, collateral and the condition of the economy. If all of this meets the lender’s standards, they will make the loan. Sometimes these are conventional loans and sometimes they are loans guaranteed by the SBA, for example Express Loans or full 7a Loans. Most of the time, however, the Real Estate Advantage Loan (504), our specialty, is not an option. Start-up businesses do not usually require real estate in the beginning. Renting is usually a more practical and safer way to get the doors open.
For some reason many people think a start-up business cannot qualify for the 504 lending program. Conspiracy! This is certainly untrue. Sometimes the 504 is a great option for start-ups. The Real Estate Advantage Loan (504) follows the same guidelines as listed above, though the “Sagan Standard” might be a little more rigid. If a start-up finds a great location that fits all of their current and future needs and the entrepreneur is highly qualified to run the business, buying the real estate can be highly desirable. We will look at every potential deal that comes through the door and put it through our “Fox Mulder” test to see if it passes. This is not an impossible test to pass (unlike Ms Gerke’s 10th grade geometry tests). We made a loan to a start-up not long ago. It was even a restaurant, which made it double spooky.
Let us know if you have a start-up deal you want us to review. The truth is out there……..