Home Equity vs. SBA

[FastTanz]

Could someone please help us here. My wife and I have plenty of equity in our house to cover all costs of starting a salon but we need help with the details on why a HELOC is better than an SBA or other bank loan. Tax advantages? interest rate? terms?

Thanks for the help in advance...

[Glowtanning530]

SBA might be difficult to get. We had a limited amount of time to decide what we were doing (we purchased already existing) We did a HELOC. The only thing with doing a "line" rather that a "loan" is that line can be subject to fluctuating interest. Get a fixed rate.

[Glowtanning530]

Oh as far as your tax advantages talk to your CPA. I am sure if varies I write off my HELOC as a business expense. I am not sure what the technicalities of it are. My plan was to look at a SBA when the business was 2 yrs old.

[RTD]

Well, any SBA loan requires a business plan, bank loan officer approval and at least 20% down.
Then you need a lawyer to be a buffer between the stupidity of the bank regulations and the real world.
Then you could find yourself limited in what manner you spend the loan money depending on the dictates of the bank.
SBAs are not so simple or often very desirable.
In so far as the taxes go....
You should have a tax accountant that you trust and if possible find one with a degree in accounting and a minor in creative writing. :-)

[Glowtanning530]

^^^^^ I have a great one. CPA looks at everything quarterly and i have an accountant who works under her who does all my books and stuff. One of the best things i did. I run a business I am not an accountant

[bradh222]

SBA was not easy but effective for us .we used some equity and sba money

[pbeale24]

With a HELOC if your business fails and you can't pay your mortgage then they take your house. With an SBA loan the bank loses the money but ultimately the government loses the money as they reimburse the bank because the SBA guarantees the loan it doesn't finances the loan. You lose nothing except your credit score and anything you used as collateral (which will hopefully be nothing if you have a good business plan and 20% down.) You might want to use the home equity to finance the 20% down payment if you don't have it in savings. The average business plan takes 300 hours to write and if you don't do a good job you don't get the loan. I would recommend getting help from a business plan expert or consultant, after doing interviews with you they will ultimately write the business plan. I would invest in the business plan, go the SBA route first and if it doesn't work for a HELOC. In other words use the banks money not your money.

[FastTanz]

Thanks for all of the posts on this...

I have been told by many that if you have equity in your house it should be used before other types of loans and also to finance as much as possible...so that is the way I have gone. I opened a HELOC for $398,000 with 7.74% rate through our personal bank...probably wont need that much but was told to get approved for as much as possible.

Everyone I have spoken to tells me that "no matter what you will have to secure any and all loans with real estate". So, I would lose my house either way with signing a personal guarantee and the fact that this is my first business.

[pbeale24]

I was a senior loan officer for Bank of America, the second largest bank in the world and the largest small business lending organization in America. Any and all loans DO NOT have to be secured by real estate with a solid business plan and a down payment. Ultimately your bank wants to give you a loan and make money via the fees and interest, they will obviously want to secure that loan with any collateral that they can but is is certainly not mandatory. They lend to you based on risk, they analyze risk as ability, stablility, and willingness to pay. You demonstrate those things through your education/experience, business plan, and credit history.

I want to refrain being negative but going the home equity route is downright foolish without exploring a small business loan, not even neccessarily through the SBA. The SBA can only be used once a bank rejects your business plan anyway, then they will step in and guarantee the loan if the business plan is good enough. Why use your own money when you can use the bank's money? It is all about exposure, by using all home equity loan you have 100% personal exposure and the bank has you by the throat. Big businesses don't cash out the equity in their real estate to finance new businesses they take loans from banks to limit their exposure, 100% if they can. They use other peoples money not their own, and that is what you should do, use as little of your own money as possible, limit your exposure.

What is done is done but if everything isn't set in stone I would get a business plan together, it might delay your opening but no business should open without a business plan anyway. I know virtually nothing about the tanning industry, maybe banks are reluctant to loan money for tanning salon start ups due to the abundant competition, and the fact that salons are going out of business like there is no tomorrow,but again, that would all be analyzed in a business plan and after that you might decide whether or not the business is worth getting into.

If your business plan outlined $400k in start up costs and you brought $150k to the table of your own money with a solid business plan there isn't a reputable bank in the country that would turn you down unless you have filed BKO in the past or some other bomb has gone off on your credit report. The only other way you would get rejected is if their decision is industry based and they think the tanning business is not worth investing in, in which case you might want to double think it as well.

I wish you all the best and I don't want to hop all over you about this, worry you, or discourage you, but if you still can explore the small business loan route. If not, run the hell out of that business and I will pray for your smashing success.

All the Best,

Patrick McCafferty

[FastTanz]

Ok... we are concerned now...

We take the space in September and dont have to pay rent until December so we have plenty of time. We have completed the HELOC process which took all of 15 minutes at our local(BofA) branch. Our credit is spotless so that isnt a problem. We also have a sizeable amount of cash to put into the deal but were told to finance as much as possible.

Which banks do you recommend? (that will finance a tanning salon because many won't) Will it hurt our credit to close the HELOC? Should we just keep it open?

P.S. I guess I should reveal that this is a franchise that I am opening...so the business plan is in place.

[sunsally]

HELOC has been a very popular option recently - and has caused many (now former) salon owners endless heartache when it didn't work out and they lost everything.

Absolutely agree with pbeale - diversity your risk, and have as little as possible tied to your personal home. The equipment certainly should serve as it's own collateral at a minimum, whether through a loan or lease.

If your franchise is telling you otherwise - it is possible - just possible - that they are wanting to avoid any close scrutiny of their "model"/business plan/cost structure etc by a bank or leasing company who might know better. This would be a red flag to me.

Either that, or they are lazy - and frankly, that would be a red flag too.

[pbeale24]

I honestly don't know the effect of opening and closing a home equity loan on your credit. Whatever it is it would be minimal compared to the risk of keeping it open and financing your business with it. That being said I think there are a few things you can do. First I would relax and just collect some information, what is done is done and you were confident enough in opening the business to take equity out of your home to start it so maintain that confidence and continue to make plans but explore the small business loan option.

Get a copy of your business plan, call the SBA and ask for a meeting ASAP to review it. They have offices all over the place and if they don't have a designated office in your area they have sattelite sights like banks and other institutions where they will actually come and meet you at. Go over your business plan with them and ask them what they think. Let them know how much cash you have to work with and what is the minimum amount you can use. Also mention you are not willing to securitize the loan with your home. Tell them you have a solid business plan (hopefully), a long history of paying your bills in a timely fashion (aka your credit history), and finally and most importantly you have cash to bring to the table which is a security in and of itself.

Make a list of local banks both small and large. Pay close attention to local banks in your area who are growing and expanding rapidly, these banks are more eager to increase their outstanding loans. Call them or meet with small business lending officers there and tell them the same thing you told the SBA. You have ____ percentage of cash to bring to the table and excellent credit. Ask them to take a look at your business plan and give you some idea as to what they think and what the likelihood of being approved for a loan is. They won't be able to tell you for sure and might avaoid that question like the plague without a commitment on your part but feel them out. DONT let them pull a credit report. If B of A gave you a HELOC they already pulled a credit report and each inquiry to your credit bureau decreases your credit score (if anyone ever tells you otherwise they are dead wrong I guarantee it, the effects are minimal but there nonetheless.) I am not sure the protocol on obtaining that original credit bureau, I am not sure if they can give you a copy or not, ask any of the branch loan officers about this they will know better than I do (This issue never arose for me, we pulled a credit bureau regardless because it was never discussed whether or not a credit bureau was previously pulled)

What I am getting at is it is not black and white. Banks want to give loans and if someone comes in with great credit, a solid business plan and cash and they can't secure real estate to the loan so be it. Their job is to limit risk but it would be impossible to eliminate it all the time. For a bank giving a HELOC for a start up is the absolute safest they can be. Second best scenario for a bank is your scenario, good credit, cash (security), and a good business plan. They give loans to people all the time that are in even worse positions then you. Feel the banks out, walk away if you don't like the deal, you are in the drivers seat and there are plenty of banks. A definite no from one bank could be a definite yes from another for someone in your position, don't take that no as a banking standard and give up.

My advice to you is take your situation, and a copy of your credit report to some banks and just talk to them, you will get all the info you need. And DON'T GO TO JUST 1 BANK.

Don't forget the SBA talk to them first and ask them what they think.


Keep me posted,

Patrick McCafferty




Ask B of A the repercussions of

[pbeale24]

P.S. Don't forget to ask Bank of America the repercussions of closing the home equity line.

[sunsally]

Originally Posted by pbeale24

DONT let them pull a credit report. If B of A gave you a HELOC they already pulled a credit report and each inquiry to your credit bureau decreases your credit score (if anyone ever tells you otherwise they are dead wrong I guarantee it, the effects are minimal but there nonetheless.) I am not sure the protocol on obtaining that original credit bureau, I am not sure if they can give you a copy or not,

LOTS of very good info in the above posts - a few points I want to make sure don't get lost!

Yes - each pull of your credit drops your score slightly. But more importantly - if you have multiple pulls in a short period (I think it is 6 in 6 months), you go into "penalty phase", and it pulls it down some more. And don't forget - lots of people might be hitting your credit - especially when you are in the process of opening a new salon! That Home Depot credit card you apply for, a new cell phone, even the electric company!

That said - now that it has been pulled by the bank where you got your HELOC - you have the "right" to get a copy of any report that a company you have authorized to pull has seen. So find out what bureau your bank used, and you may call that credit bureau and ask for your own copy - and it won't be another 'hit'. That way you can see what the lender saw - and show other lenders. They will WANT to do their own - but until you are closer to thinking they are "the one" you want to go with, ask them to talk to you in general terms about what your rates, the conditions, etc would be ASSUMING you have the credit you are showing them and you pass their "model" and are approved

Note: getting financing - whether loans or leases, isn't "just" about your FICO score. That is a lot of it, but it also takes a look at your total credit picture including late payments (even ONE late payment on a mortgage, even 5 years ago, leaves a big ugly mark!), how much of your credit line you have extended (e.g. you have a credit limit of $10,000 on your Visa and you have $7,000 charged on it vs. $700), how much "other" stuff you have (e.g. a house that has two mortgages and a HELOC on it with virtually no equity in it), etc.

Finally - you can do a "blend" of financing options, to give you the best possible rates and level of risk for YOUR INDIVIDUAL SITUATION. Everyone will be different. Some will go mostly SBA. Some will blend some local bank loan with some equipment leasing. Others will do HELOC and credit cards (OUCH - The LEAST desired method and most risky!). Do your homework and find the "best" option - for you.

[movieking]

All of the above information is great but I think one of the most important things any person can do is to have an established relationship with a banker. If you obtain all of your loans over the years from different sources and never build the relationship with a local loan officer you will find it much more difficult to start out and to continue growing if that is the route you want to go.

I started in business in 1988 and even though I had a very profitable business it was not until about 5 years later that I found a banker that believed in my business and was then there for me to add many more locations over the next few years. All banks have a list of business types they do not loan to and for most that list includes video stores, restaraunts and tanning salons.

[FastTanz]

Did a little scrambling today... Thanks for all the help! This is a great place for real life solutions...

[pbeale24]

Keep us posted....

[Tan Orexic]

All,

Guess I got into this one a bit late but what we did back in Feb 07 was open an LLC that eventually opened our Salon We bought the equipment, rented the equipment and loaned money to the LLC. That way we had the time to write the Business Plan and in the mean time the Salon is operating and the Business Plan takes a more real approach.

When we do apply for the Small Business Loan it will be for the Salon to buy the equipment from us and pay the LLC back for the loaned money. Since the LLC owns the Salon and we have been renting the equipment the back due rent will be due and so is all the rent from the equipment. Plus the purchase price which is the same as we paid for it (I won't even give myself a discount).


Tan Orexic

[EliteMike]

will that work??

[love sun]

Where did the LLC get the money?