QUESTION ON Buying a Business With Little Money
We are trying to get funding for buying a strip club. We have no credit and no large sums of money, but we do have 19 years of experience. I am also a Vietnam Vet. Would SBA or private funding be our best bet? We need 1.3 million dollars to purchase a running club. Also is it normal for a consulting firm to charge $15,000.00 up front to put us in touch with private investors? One consultant says you do not need good or any credit to get SBA or private funding. Is this true?-
You are looking at a very big project involving millions of dollars. Without money and a less-than-perfect credit, getting loans for a project that involves millions is highly unlikely.
As discussed in the article Six C’s of Credit: Bank Loan Requirements, banks look for 6 factors before approving a business loan application:
- capability to Manage the Business
- collateral and Guarantees
- context of the business
- conditions and terms of loans
In this world, the saying “it takes money to make money” unfortunately holds true. Banks will not give you 100% of what you need. They want to see that you put your own capital into the business. Some banks require up to 30% of owner’s equity — meaning your own money — in the business.
Banks always look for ways to get their money back — and that means collateral and guarantees. They want an escape hatch in the event they give money to a business that will not prove to be profitable.
Your lack of credit will also be a huge minus point for your bank loan application. One of the first things that banks look for when reviewing loan applications is the credit history. They want to see how well the applicant honors their debt obligations and the payment patterns. You can even try it personally by going to your bank and explain your predicament to the loan officer. You can very well expect what the result will be. I suggest you read the article Why You Can’t Get a Bank Loan for Your Small Business.
With regards to the SBA, it is important to remember SBA only offers guarantees to bank loans. Borrowers apply to a participating lending institution, aka the bank. This means that your application will still be reviewed by a bank, and they are no less stricter than when you apply for a loan without SBA guarantees. For SBA loan applications, the bank will still want to see good personal credit rating, your stake in the business, background and experience in the business, collateral, among others. You can visit the SBA website and learn the financing procedures right there.
The business you are planning to start requires massive capitalization. If you have no money, you may want to downscale your plans and start a business that will require a smaller capital. Or find alternative sources of income that can help you raise the capital you need. You need to have money, not just to buy the club, but the cash flow to make it operate and run. It will be good if the club makes money on day 1, but that is not often the case. You need to have capital to keep the business going.
As for the consulting firm willing to help you find investors, some matching services do charge fees. However, be very careful as to what you will be paying. Some firms charge initial fees anywhere from $1,000-$15,000 (and even more) just to prepare the investment pack that will be presented to potential investors and to do due diligence to see if you and your business are likely to attract investors. If they find an investor for your project, they then charge a separate success fee, anywhere from 5-10% of the money raised. Some of these firms work well and can deliver you the right investors, but there are also some that will simply charge you even if they know that you will not pass due diligence (meaning they charge you for the initial fee of $15,000 even if they know you are not likely to attract investors).
I hope I am able to help.
Nach M Maravilla
Recommended Resources on Buying A Business With Little Money
- Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money
- Get Your Business Funded: Creative Methods for Getting the Money You Need
- Unlimited Business Financing: Learn How To Obtain $250,000 Or More In Business Funding Without Harming Your Personal Credit
- Business Loans From Family & Friends: How to Ask, Make It Legal & Make It Work
- How to Raise Capital : Techniques and Strategies for Financing and Valuing your Small Business
Article originally published in March 2001. Updated May 14, 2014
Category: Q & A