Many of our clients are asking us about small business loan amounts that are higher than those posted on our website WeCanFinancial.ca. In many cases we can accommodate higher loan amount assuming a correct presentation of the deal, financial projections and use of proceeds for the small business loans. But also in many cases it is advisable to implement a combination loan where a portion of the loan comes in from the small business loan program and the other portion comes from private equity derived from the existing home equity or other real estate equity. In this article we will talk about the combination of financing products and we will give good examples on when such combination might make sense where it is reasonable to implement.
Very often clients cannot qualify for small business loan due to an incorrect understanding on what can and can not be financed by institutions using government guaranteed small business loan program. Our general guidelines for the small business loan applicants is that small business loans applicants can qualify for $150k – $350k financing depending on the size of the business and money uses. Overall small business loan can finance up to $500k assuming real estate is involved in the financing – I.e Company is purchasing some sort of real estate using the small business loan proceeds. In many cases we can go above $500k but the deal must make sense and have strong financial performance with good documentary proofs of financial performance. Generally it is difficult to do a small business loan above $500k without accountants “reviewed” financials and in many cases audited financials could be a good help in qualification for an unsecured business loans.
Now in cases where we can provide say some portion of the money from institutional lender but money is not enough then we can review the possibility of adding a private equity loan on top of the business loan amount. Our firm is well positioned to do private equity loans since we are running a proprietary private equity fund that has always cash to invest for deals backed by real estate. Many small business owners are also real estate owners. Since qualifications for small business loans require a home ownership or condo ownership in the first place such a combination comes naturally. Our firm very comfortably offers 85% private equity financing for people who require such an option either with or without a small business loan. Business loan combination with private equity loan
For example, the client requires $450k small business loans for inventory, equipment and product expansion, with a small portion used for operating capital. We qualify the client for a small business loan of $350k and we are short $100k. If a client owns a home with $200k equity in the home, it’s safe to assume that we can extract $100k as a private equity from his residence. This will take us only a couple of days to do. Now private equity is expensive, and it takes a good consideration to review if this option works for the client. But if the difference of $100k will make $300k over next 5 years in business income, this will definitely make sense. For your information, most small business loan products are priced between 5.25% to 8.5% interest.
The highest interest is allocated to operating capital money because operating capital makes on average 30%-50% in gross margin. Therefore 8.0% op cap money is well repaid. The cheapest rate is for equipment and inventory financing, therefore most deals have to be structured as much as possible around these 2 items.
Private equity on the other hand is going at 10%-12%. It could be cheaper if it is a primary debt but could be a bit more expensive especially when it is subordinate to primary debt owed to the bank. As usual it is advisable to ask a professional how to structure this in the most efficient and cost effective manner and our knowledgeable associates we are well positioned to do this both for small business loans and private equity loans.
So please call any time and find out more – 647-560-1736.
Happy financing everybody !