Question – Hello! I am trying to get a retail store open and need a loan of $140,000. I have a business plan, many years of experience, a location (though I haven’t signed a lease) and a merchandise and fixture plan. My question is this….. How does the bank value the business assets of a start-up? In retail, so much money is tied up in inventory…. does this count as collateral against the loan? I plan on spending about $60,000 on inventory and the rest on build out, equipment, cash reserve of about $60,000 and the remainder on misc. licenses and other start up expenses.
I have great personal credit and have about $130,000 equity in my home.
Will I have to pledge my home to get a loan? If I qualify for an SBA loan, doesn’t the SBA guarantee the loan to the lender?
Thanks for any clarification you can provide.
Our Response – In most cases, the bank and the SBA as will count collateral based on a percentage of what you are purchasing. For example, inventory is typically collateralized at 50% and equipment 75-80%. With some of your request going to cash and for the build out in a leased building (assuming once it’s in place it stays), that money has no collateral value and will be where your house equity will be critical. Even though the SBA is guaranteeing the loan, the bank has to secure sufficient collateral to meet the SBA requirements and be able to obtain the guarantee. The bank will want to see at least 80% of the loan backed by a hard asset. Typically you would need to bring a minimum of 10% equity into the project, but I think the equity in your house would suffice. The upside is that you may not need the SBA guarantee since you have enough collateral and credit. This will offer you savings through lower interest and upfront fees so I would recommend not asking the bank initially for a SBA guarantee and see if they can fund in-house.