Charles Kuhn owns the “oldest bicycle store in America,” he says. Now he’s trying to get a $1 million loan to refinance the mortgage on the bike store so he can pay down credit card debt and obtain working capital.
Why He’s Having Trouble Getting a Business Loan
1. If the $100k in credit card debt is reporting to his personal credit then his scores are probably artificially low. If they’re reporting to his business credit then his scores are probably artificially low.
2. Adjusting the salary up and down to reflect little profit is not something most mature or seasoned business owners do. They set a salary to match their needs and pay the excess profits out as a distribution, reinvest in the business through inventory and/or equipment, or pay down debt. This makes the borrower appear less savvy in how he manages his financials.
3. What is the 100k in working capital for? I’ll bet there is a lack of a specific plan.
4. The debt service ratio is messed up because he shows less than 1% in profit. By paying off existing credit card debt, he’ll open up those credit cards to run right back up. The underwriter is going to assume the worst, and look for a more strict debt service ratio as a result.
5. Instead of trying to roll all of the financing needs into one loan, he should instead break them up:
- a. Keep the real estate refinance a pure refinance without anything new attached to it.
b. Borrow from friends and family to payoff the credit cards.
c. If friends or family doesn’t work then use non-traditional financing like P2P.
d. Once the real estate is refinanced apply for an SBA 7a Express loan for the working capital.
6. His complaint about the SBA requirements is alarming to any lender. Why is it onerous to provide well thought out financial projections and legitimate accounting for the previous year? Any lender would be worried about him being a lackadaisical borrower, and who wants to give a million bucks to someone like that?
Now it’s your turn. After reading The New York Times article, why do you think he’s having trouble getting a business loan?